Pension Funds to Seek Risk and Valuation Professionals Amid Hedge Fund Woes
Trouble at two Bear Stearns hedge funds is sending shockwaves through the markets and raising a red flag for many investors, particularly pension funds. Financial statistics show that pension plans now outpace high net individuals with respect to hedge fund investing. Now more than ever, pension fund decision-makers must ensure that their due diligence is rock solid. And that is a critical issue for job seekers looking for pension fund opportunities as well as hedge fund jobs.
Bear Stearns recently announced a $3.2 billion plan to stem losses at one of its hedge funds that has been hurt by bad mortgage-derivatives trades - the biggest rescue since 1998. Now, after offering to bail out one fund, Bloomberg reports that Bear may also have to salvage the second of its two teetering hedge funds.
The firm’s two hedge funds, which speculated in collateralized debt obligations, were hit hard amid rising defaults of subprime mortgages. The move underscores the continuing danger of the subprime-mortgage business. So, what could Bear Stearns’ trouble portend for future problems with subprime loans if other funds made similar mistaken bets? Concerns are mounting that the problems with the two funds are just the tip of the iceberg.
The stakes are high. The hedge fund industry currently oversees $1.57 trillion worldwide, according to Chicago-based Hedge Fund Research. And faced with growing numbers of retirees, pension plans continue to pour billions into hedge funds.
Hedge Fund Daily cites Watson Wyatt Investment Consulting in reporting that the world’s top 150 alternative asset managers hold a combined $600 billion of pension fund assets. Nearly two-thirds of that amount or $380 billion is in real estate, following by $105 billion in funds of hedge funds, $60 billion in private equity funds of funds and $12 billion in commodities.
Now, as pension fund investment into hedge funds grows, Watson Wyatt’s Global Head of Investment Consulting, Roger Urwin, told Hedge Fund Daily that more may mean less, in term of returns. ”As assets flow into these strategies at an ever quickening pace, the ability of some managers to continue to deliver good performance is in doubt,” he says, “Once performance fees are included, investors will have to work hard to ensure that alternative assets remain a value creation proposition for funds.”
Meanwhile, a joint study by the Bank of New York and consulting firm, Casey, Quick & Associates, shows that pension plans and other large institutions are expected to invest as much as $300 billion in hedge funds by 2008, up from just $5 billion a decade ago. Failure on the part of pension plans to rigorously review risk management and valuation practices could mean financial ruin for many retirees. Pension officials may be forced to question whether the risks associated with hedge funds are appropriate considering the sole purpose and legal obligation of pension funds is to pay out predetermined benefits to retired workers.
The bottom line: pension fiduciaries must make absolutely sure that they have done everything possible to avoid a hedge fund meltdown. Money managers will spend $7.4 billion on in-house research in 2011, up 28 percent from 2006, according to Integrity Research Associates. And executive recruiting firm, A.E. Feldman, says professionals with expertise in valuation and risk management are in a position to benefit from the demand.
