Public pension funds are reporting a large increase in their alternative asset class weightings as portfolio performances continue to suffer. Public funds control over $2.45 trillion in assets and are increasing their portfolios risk levels, largely with increased investments in hedge funds, in an attempt to compensate for losses. Hedge funds have reported their largest losses year to date in at least eighteen years with an average negative return of 3.5% according to Hedge Fund Research Inc.'s composite index.
Public funds are placing investor capital at risk while a nonprofit public policy group estimated that at the end of 2007, states were short $361 billion in pension payments scheduled over the next 30 years. South Carolina's retirement system announced in February that they were increasing their asset weighting in hedge funds to 45%; an increase from zero 18 months ago.
While public funds are down an estimated 5.1% year to date since the end of June, fund companies and managers may be overreacting. The average performance may be below the risk-free rate of return measured by the ten year Treasury bond, but it is also outperforming the negative 12% year to date return of the S&P 500 index. Pension funds are traditionally employed to create stable growth over the long term. However, managers may be taking on excessive risk; a risk of further loss that many investors aren't prepared for.
See Bloomberg: States Double Down on Hedge Funds as Returns Slide