Pension Funds Slowed Their hedge Fund Allocations In The Third Quarter Of 2020

Investor sentiment on hedge funds improved during the first part of the year, but pension funds remain cautious about them, according to a recent report. Pension funds only added to hedge funds they were already invested in or already knew. 

Pension Funds Are Holding Back On Hedge Fund Allocations

According to a report from HFM Insights, U.S. public pensions are especially investing in credit and real estate, which accounted for over 40% of the $2.2 billion in gross hedge fund flows during the third quarter. The firm also found quarter-over-quarter declines in the total value and number of hedge fund commitments from pension funds during the quarter. HFM said a second wave of top-ups to hedge funds failed to materialize. 

The firm also found that more than twice the number of hedge fund managers were terminated by public pensions as were hired during the third quarter. However, the second quarter was a strong one for pension allocations to hedge funds, which means the industry is up in terms of hires at 15 year to date. 

Interestingly, even though the California Public Employees' Retirement System (CalPERS) has rejected hedge funds, California was still the top U.S. state by value of pension hedge fund mandates at $853 million. HFM also said one-third of institutional investors in North America see hedge funds more favorably now than they did when the year started. Only private debt has seen a greater increase in favorable views. 

Hedge Funds Were Far Down The List In Commitments For Q3

HFM Insights found that private equity was still the top allocation for pension funds during the third quarter with $24.6 billion in commitments. Credit and debt were in second place with $15.1 billion in commitments. Real estate was in a distant third place with $6.3 billion in commitments, while equity was in fourth place with $3.7 billion in commitments.

Hedge funds came sixth on the list even below infrastructure and real assets with $2.2 billion in gross commitments during the quarter. Hedge funds did beat out fixed income and multi-asset commitments, however.

Of the $10.5 billion in year-to-date gross commitments to hedge funds by pension funds, credit and real estate funds attracted $3.6 billion. During the third quarter, pension funds allocated $900 million to credit and real estate hedge funds, according to HFM. 

Hedge Funds Are Losing Momentum In Pension Fund Allocations

HFM Insights found that private equity has continued to pick up steam this year in terms of pension fund allocations. Between the second and third quarters, pensions boosted their commitments to PE by $10.4 billion. 

Credit and debt also picked up momentum between the second and third quarters with an increase of $2.4 billion, which includes commitments to credit and debt hedge funds. HFM also found a $1 billion quarter-over-quarter increase in commitments to real estate, including real estate hedge funds. 

However, when looking at hedge funds as a whole, there was a $1.7 billion quarter-over-quarter decline in pension commitments. HFM said pensions also wrote smaller checks to hedge funds during the third quarter. Further, the firm said their interviews conducted during the second quarter indicate that most new allocations to hedge funds have been and will continue to be top-ups with funds pensions are already invested in.

Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.