Can Hedge Funds Save DB Plans?
Research: 10% allocation can add $13 a year.
BY Caroline Cakebread | September 27, 2011
Even a modest allocation to hedge funds could help ailing public pension funds improve their returns by about $13 billion a year. So argues Dr. Everett M. Erlich in a recent paper called The Changing Role of Hedge Funds in the Global Economy. The paper models a standard pension fund portfolio without hedge funds and a hedged portfolio with 10 per cent of its assets in hedge funds.The paper also makes the case that hedge funds are not a source of systemic risk. As he argues: “They were substantially less leveraged and, rather than a source of risk, many were harmed by the actions taken as part of the bank rescue of that time (for ex- ample, the ban on short selling that crippled and drained li- quidity from the convertible bond market). Rather than “too big to fail,” hedge funds are generally “too small to bail.” Download the full article here.
According to a recent paper by Dr. Everett M. Erlich even a modest allocation to hedge funds could improve
Hedge funds have evolved from an elite investment to a standard component of investment portfolios, and in so doing, offer institutional investors, such as pension funds, the opportunity to improve returns. The modeling performed for this analysis suggests that a modest allocation to hedge funds would improve the returns to public pension funds by approximately $13 billion annually. Moreover, the track record of recent years further illustrates that hedge funds have not been a source of greater systemic risk — rather than “too big to fail,” they are generally not an important source of systemic risk.