By Susan Barreto
When a global
positioning system says to hang left, what happens when the car
veers to the right instead? Any self-respecting GPS will
admonish you briefly, but calculate a new map and path as well
as an estimated time of arrival in a matter of seconds.
Right or left? The road map for pensions is anything but a
single Interstate cutting through the centre of the country
when it comes to directions drawn up by US corporations. For a
number of reasons there maybe a new road map in boardrooms
where the funding ratios among US corporate pension funds are
on the rise and the opportunities for hedge funds to enter the
picture are becoming more plentiful.
Mercer says that during the fourth quarter of 2010 many
large plan sponsors publicly announced significant
discretionary funding to their US pension plans. The estimated
aggregate value of pension plan assets of S&P 1500
companies at 31 December was $1.37 trillion and as of 31 March
that amount had grown to $1.44 trillion, while pension
liabilities decreased by $20 billion over that time frame.
If hedge funds were to account for as little as 10% of US
S&P 1500 companies’ portfolios, there would be
$144 billion to put to work. That’s not to say
some of them haven’t made moves already.
Now that the gas tank is full, let’s see what
the GPS for US corporate pensions has in store. One map shows
that dedicated hedge fund programmes are added as part of a
broader alternative investment strategy. But if an investor
were to consider a left-hand turn there is the broader question
of whether or not hedge funds have a bigger role of 15%-plus to
play across the investment portfolio in both hedge fund and
fund of hedge fund mandates.
What does this mean in practical terms? Some believe the
improved funding status of corporate pensions will lead to more
direct strategy allocations. For example, some see a greater
move into long/short equity as corporate pensions look to add
some hedging to the biggest portion of their portfolio
– US equities.
"For plan sponsors who have slashed their long-only equity
mandate, an allocation to a long/short strategy, which is
designed to provide downside protections and alpha generation,
can be folded into a traditional equity portfolio, thereby
maintaining the portfolio level allocation, including
alternatives," says Carrie McCabe, founder of Lasair
McCabe, whose firm was established in 2008 with backing from
a large corporate pension fund, has found that by including a
long/short strategy in a portfolio, plan sponsors can look to
increase annualised returns, reduce volatility and mitigate
risk. According to one corporate plan sponsor, blindly
allocating to equities will not happen as plans that are better
funded want to de-risk the investment portfolio, which could
mean an increasing reliance on fixed income as well.
Mercer has found that corporate pension assets are still
largely invested in higher risk assets such as equities or real
estate, with less than 40% allocated to lower risk assets such
as fixed-income securities – including long-maturity
fixed-income investments that can offset the changes in plan
liabilities when discount rates rise or fall.
It may be that the roads that these corporations have to
travel are just being built, but then again there could be
roadblocks. For example, it is reported that the Department of
Labor’s Employee Benefits Security Administration
in the US wants to expand the definition of a fiduciary and
there is some concern that prime brokers’ cap
intro groups may be considered as fiduciaries. This would mean
they would be legally responsible for offering pensions the
'right’ hedge fund investments.
A quick-acting GPS might come in handy in the coming months
to adjust the hedge fund itinerary, but where corporate
pensions find themselves is similar to where many US public
pensions were last year
in charting a realistic course to long-term investment