Protecting Pension Plans’ Hard-Won Gains: Could Hedge Funds Play a Role?

In the November 2018 issue of Benefits Magazine, covering pension plan issues affecting multiemployer, single employer and public plan representatives, Investment Managing Director in Cambridge Associates’ Pension Practice, Joe Marenda, contributed an article discussing how hedge funds may play a role in protecting pension plans’ funded status in the event of a recession or stock market correction.

Marenda provides an overview of the challenges plans face, explaining the positive impact that a carefully selected group of hedge funds can have on a holistic pension plan strategy. Key takeaways from the article include:

• Hedge funds may provide attractive long-term returns that have lower volatility than and lower correlation to, equities. They may be attractive to plans looking for a strategy to protect their funded status in the event of a recession or stock market correction;
• Sizing of the hedge fund allocation, strategy selection and manager selection are critical to long-term success;
• Effective manager selection is crucial to a successful hedge fund allocation because the difference between the best performing managers and the average fund is significant;
• Challenges include high fees, lack of transparency, illiquidity, use of leverage, market beta and alpha source; and
• To implement a hedge fund strategy, pension funds may choose to hire skilled staff, partner with an experienced hedge fund advisor or hire a fund-of-funds manager.