Categories:  'Economic Inequality'  

Hedge Funds Don’t Help Public Pensions

Since the early 2000s, many managers of public pensions (i.e. retirement funds for state employees like teachers and firefighters) have turned to hedge funds "to [...]

Since the early 2000s, many managers of public pensions (i.e. retirement funds for state employees like teachers and firefighters) have turned to hedge funds “to try to close the expansive gap between what the pensions owe their beneficiaries and the amount of funds that they have to meet those obligations.” A report by Pew Charitable Trusts shows that in 2013, that gap amounted to about $1 trillion nationwide.

The idea behind public pension investments in hedge funds is that hedge funds can move against the general trend of the stock market, “hedging” pensions’ other investments when the stock market declines.

But recent reports by state legislatures and the American Federation of Teachers contradict the idea that hedge funds are an effective way to close that gap – the American Federation of Teachers “examined the hedge fund performance of 11 large public pensions and found that these investments exacted a high cost, had laggard returns and generally moved in tandem with the overall stock market.”

In other words, investments in hedge funds were no better, and probably worse, than other types of investments. “For every pension fund reviewed [by the American Federation of Teachers study], the total fund portfolio outperformed the hedge fund piece over the period in which hedge funds were in the mix.”

Furthermore, the fee structure for investments in hedge funds guarantees profits to the hedge fund while pension funds’ returns are subject to the uncertainty of the market, passing that uncertainty on to taxpayers and future public sector retirees.

Articles

Publication Date: 06/11/2015
Source: The New York Times
Author: Gretchen Morgenson