(July 4, 2011) — The $42.3 billion New York City’s Teachers’ Retirement System (TRS) has rejected an allocation to hedge funds.
The pension’s investment board — which has been discussing possible changes to the retirement system’s asset mix — had been weighing the possibility of a 3% allocation to the sector, which could have totaled more than $1 billion, HMFWeek reported. However, despite the widespread popularity of the asset class, TRS decided not to pursue the investment “based on feedback from various discussions on this topic,” a member of the investment board told the publication.
As part of TRS’ final recommendations, the investment board decided to increase allocations to opportunistic fixed-income, convertibles, and emerging market equities, as well as the addition of emerging market debt as a new asset class.
Institutional investors, such as the $920 million University of Kentucky Endowment Fund, have flocked to hedge funds in recent years. In April, the Kentucky university, which started investing in hedge funds in 2009, approved a recommendation to double its target hedge fund allocation to 20% — a percentage suggested by consultant RV Kuhns & Associates last year following an asset allocation study. The move was in line with decisions by other institutional investors — namely large US pensions — that have boosted direct hedge fund allocations to tackle underfunding. The increasing attractiveness of the asset class is reflected by a February report from Preqin that revealed institutional investors now constitute the largest piece of the hedge fund capital pie.
New York City’s pension funds, however, have been slower to allocate to the sector. Three of the city’s five pensions — the $23.1 billion Police Pension Fund, the $39.6 billion Employees Retirement System and the $7.6 billion Fire Department Pension Fund — made their first allocations to the hedge fund space earlier this year. Following first allocation to the sector by New York City’s roughly $23 billion Police Pension Fund, the city’s Chief Investment Officer Larry Schloss said in a statement: “Consistent with the long-term objectives of providing reliable returns, reducing investment volatility, and capitalizing on the changing market landscape, the New York City Comptroller’s Office has recommended, and the Police Pension Board approved, an initial allocation to hedge funds…Subject to satisfactory negotiations, we expect to initiate a hedge fund-of-funds program which is to be followed by a series of direct investments in hedge funds. This strategy builds on Comptroller John C. Liu’s and the Board’s commitment to protecting pensioners and taxpayers.”
Similar to the relatively slow embrace of the sector among New York City’s retirement funds, the $84 billion State of Wisconsin Investment Board (SWIB) made its first-ever allocation to hedge funds in February, allocating $100 million to Capula Investment Management LLP. The revised strategies were part of SWIB’s new allocation targets for its $64.6 billion core fund, which the board adopted last January.
Click here to read “The End of the 3 and 30”, from the summer issue of aiCIO Magazine, which looks at how hedge funds-of-funds must adapt or perish.
To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742