(January 7, 2013) — Pension funds will continue to be the largest contributor to growth in the hedge fund industry worldwide in 2013, according to predictions by Agecroft Partners, a third-party marketing firm.
The goal among pensions? Enhance returns and reduce downside volatility in portfolios in order to help manage massive unfunded liabilities. As a result of declining interest rates, forward looking return assumptions are currently around 3% for fixed income portfolios managed against the Barclays Aggregate Bond Index which currently represents approximately 30% of pension funds’ total assets, Agecroft noted. “With current actuarial return assumptions averaging approximately 7.5%, we will see pension funds shift more assets from fixed income into hedge funds as long as interest rates stay low.”
Some in the industry, however, assert that the firm’s predictions may be slightly farfetched. “It seems a little more ambitious than what may actually occur,” said David Gold, senior consultant of manager research at Towers Watson. “Pension funds in the US will definitely continue allocating to hedge funds, but a lot of those searches will be replacement searches–or a recycling of capital. So, net new growth might be more limited.”
He continued: “Having a diversified portfolio and allocating to a number of managers across sectors remain critical.”
According to Agecroft, despite the lackluster investment performance for the industry over the past two years, the hedge fund industry will set a new record for assets in 2013. A recent report by Goldman Sachs outlined that 88% of hedge funds were lagging the S&P 500 as of December 21.
The growth will also be driven by the passage of the Jumpstart Our Business Startups (JOBS) Act, Agecroft said. “This conclusion is based on several dominant and emerging trends Agecroft has identified through their contact with more than 2,000 institutional investors and 300 hedge fund organizations during 2012.”
The JOBS Act will help level the playing field within the hedge fund industry by giving investors greater transparency, Agecroft noted. “We will see many hedge funds provide on their websites detailed information on their organization, investment team, investment process, risk controls, performance and information on service providers. In addition, more managers will participate in industry databases making it easier for investors to identify and compare managers within a strategy. Investors will also benefit from more hedge fund managers being interviewed in the media relative to their hedge fund strategies and investment ideas…Those firms that implement effective marketing strategies to take advantage of new changes in legislation by the JOBS ACT will have a distinct advantage over their competitors.”
Margolis Advisory Group’s President Jeffrey Margolis voiced a similar view, telling aiCIO in September that the JOBS Act will accelerate the institutionalization of hedge funds. “Hedge funds who embrace the new, less restrictive environment will need to build mature, comprehensive strategic communications programs,” he said.
Gold’s predictions are more cautiously optimistic. While he agrees that the Jobs Act will accelerate transparency among hedge funds, he noted: “I don’t expect 2013 to be the year where you see hedge funds advertising on TV.”
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