HEDGE FUNDS AND PENSIONS

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Hedge Funds and Pensions

Contents

Table of Contents:

Overview

Hedge funds originated as an investment vehicle to help

diversify portfolios, manage risk, and produce reliable

returns over time. While hedge funds’ investor base has

evolved though the years – from individuals to institutions

such as pension plans, universities, and foundations –

their core goals have not.

Institutions face mounting challenges toward meeting their

financial obligations. Pension plans, in particular, face

demographic challenges resulting in a funding shortfall.

As a result, pension plans have shifted investment

strategies in recent years to alternative investments -

including hedge funds - which have helped place

institutions on firmer ground over the long-term. This

presentation details the growing partnerships between

hedge funds and public and corporate pension plans.

Overview 3

Why Institutions Invest with Hedge Funds 4

• Public and State Pension Plans 5

• Corporate Pension Plans 7

• University Endowments 9

• Foundations 10

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Hedge Funds and Pensions

Hedge funds’ investor base has evolved significantly

over the years, with 65% of assets under management

currently coming from institutional investors such as

pensions, endowments, and foundations.

Many institutions are currently working to cope with

major demographic and fiscal challenges, including

funding shortfalls, which impact corporate and public

pensions’ abilities to fulfill their funding obligations. As

a result, institutions are increasingly seeking ways to

diversify their investment portfolios to produce reliable

returns.

*Source: Preqin Special Report: Hedge Funds October 2012, pp. 16

Overview

FACT: 65% of hedge fund assets are

held by institutional investors.

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Hedge Funds and Pensions

Why Institutions Invest with Hedge Funds

Sample Corporate Pension Asset Allocation Table:

Pension funds have realized that a simple

mix of stocks and bonds will no longer

provide the returns required to meet their

obligations to pensioners.

This reality has produced an industry

evolution that has led to more pensions

investing in allocations and thereby growing

the universe of individuals who benefit from

hedge fund investments.

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Hedge Funds and Pensions

Public and State Pensions Invest in Hedge Funds

Public and state employee pension plans offer retirement security for millions of workers,

retirees, and their families nationwide. These pension plans have increasingly partnered with

hedge funds to help diversify their investments and help to provide economic security to their

beneficiaries.

*Source: The Changing Role of Hedge Funds in the Global Economy, Everett Ehrlich, pp. 1 (September, 2011)

A recent study estimated that a

modest allocation to hedge funds

could improve returns of U.S.

public pension plans by

approximately $13.67 billion

annually.*

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Hedge Funds and Pensions

Public Pensions Invest in Hedge Funds

Hedge funds’ investor base in the U.S. at the

state and public plan level is diverse.

Investors in hedge funds range from unions

such as AFL-CIO to local retirement plans in

Louisiana to teachers in Illinois.

Examples of public pension plans investing in hedge funds include:

*Sources: ¹Preqin Special Report: Hedge Funds October 2012, pp. 16

Public pension funds are one of the most

prominent groups of institutional investors

allocating investments to hedge funds. Public

pensions currently represent over 20% of all

institutional capital invested in hedge funds. *

The number of public pension funds investing in

hedge funds in the U.S. alone has increased

significantly over the past five years from 196

known to be allocating to hedge funds in 2007 to

approximately 377 today. *

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Hedge Funds and Pensions

Corporate Pensions Invest in Hedge Funds

Examples of Corporate Pension plans investing in hedge funds include:

Many of the largest employers in the U.S.

view hedge funds as an essential tool in

their investment toolbox in their efforts to

provide reliable, risk adjusted returns that

enable their plans to pay the retirement

benefits to millions of Americans.

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Hedge Funds and Pensions

Corporate Pensions Invest in Hedge Funds

Corporate pension plans investing in hedge funds include:

The partnership between hedge funds and corporate pension plans has

continued to expand in recent years.

Studies indicate corporate plans are looking to increase their

allocations to hedge funds in the coming years as well. According to the

October 2012 Preqin Report, 16% of institutional investor capital in

hedge funds is currently held by private sector pension funds.

Preqin Special Report: Hedge Funds October 2012, pp. 16, figure 29. Source:

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Hedge Funds and Pensions

University & College Endowments Invest in Hedge Funds

University and college endowments

were among the first institutions to

partner with hedge funds in the early

1990’s, and this relationship has

strengthened in recent years.

A recent study estimated that a modest

allocation to hedge funds could improve returns

of U.S. college and university endowments by

approximately $1.73 billion annually.*

Endowments investing in hedge funds include:

*Source: The Changing Role of Hedge Funds in the Global Economy, Everett Ehrlich, pp. 1 (September, 2011)

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Who Invests in Hedge Funds?

Foundations and Non-Profit Organizations Invest in Hedge Funds

Non-profit foundations and charitable organizations around the world partner with hedge funds to help

establish the financial resources needed to fund critical projects in local communities.

For example, The Nobel Foundation recently announced plans to invest more money in hedge funds to

boost returns to restore the award to its previous size after having to reduce its cash prize by 20% in 2012.

Here are additional, specific examples of types of Foundations that have benefitted from their investment in the

hedge fund community:

Source: Nobel Prize to Get Hedge Fund Boost After Awards Sink 20%, Bloomberg News, December 2012.

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Summary

The partnership between hedge funds and

pensions continues to grow. Pension funds are

seeking reliable returns and diversified portfolios,

with many plans increasing existing allocations

with hedge funds. These plans use a variety of

asset allocation techniques and most call for a

significant allocation to hedge funds and other

alternative investment options over the next few

years.

Hedge funds are not a silver bullet for the

challenges facing public pensions, but they are

increasingly part of a comprehensive and

responsible approach toward meeting financial

obligations.

Hedge Funds and Pensions