Casting for Returns

To juice up their sagging portfolios, pension fund managers are seeking alternative investments.

Expenses are high, too: it’s not unusual for hedge funds to charge investment-management fees of 100 basis points and then keep 20 percent of any investment gains they generate. First-time investors are strongly advised to invest with an experienced manager or the guidance of an outside consultant, especially since they are unlikely to have the expertise in-house to navigate what could be a minefield for the uninitiated. “These are investments that require more attention, more oversight, more work for someone,” says McInerney. “There’s a sharp learning curve to understanding what they’re about.”

To be sure, hedge-fund investors have been burned. In 2001, the Art Institute of Chicago sued Dallas-based hedge-fund manager Integral Investment Management LLP, claiming that Integral deceived the institute about the safety of its funds. The institute, which had invested about 6 percent of its portfolio with Integral, said one of Integral’s funds subsequently lost about 90 percent of its value. More recently, the $300 million Japanese hedge fund Eifuku was wiped out in just one week early this year after large, highly leveraged bets on a handful of Japanese stocks went bad.

Nonetheless, hedge-fund returns can be spectacularly good. In the private-equity or hedge-fund arenas, the spread in performance between first-quartile and fourth-quartile managers is far greater than the comparable spread for managers of, say, large-cap domestic equities. “The median private-equity investment we see performs no better than the public markets,” asserts Ilkiw. “But the dispersion of returns is high.”

GE Asset Management (GEAM), which runs approximately $180 billion for General Electric’s pension funds and insurance subsidiaries as well as for other companies, has been steering money into private equity for 25 years and using hedge funds for about 10. GEAM executive vice president Don Torey, who heads the organization’s alternative investment operations in Stamford, Connecticut, says he expects those investments over the long term to generate returns 400 to 500 basis points above those available in the public markets as measured by the S&P 500. In fact, he says, GE’s Pension Trust has “outperformed that target over any long-term time period.”

In real estate, where GEAM has been investing for about 50 years, the goal is steadier returns “in the 9-to-11 percent range annually,” says Torey. Overall, he adds, GEAM has about 15 to 18 percent of GE’s pension plan allocated to alternative investments, with the largest share in private equity and the smallest share in hedge funds.

“[Alternative investments] is definitely an area that people should be looking at as part of their program,” says William Quinn, president of Fort Worth-based AMR Investment Services, the pension-management arm of airline holding company AMR Corp. His organization has a 10 percent targeted allocation to alternative investments but currently has only about 5 percent of its pension assets actually invested in them, some in real estate and some in private equity. He’s steered clear of hedge funds thus far, expressing misgivings about their lack of transparency and, in some cases, their use of leverage and nearly boundaryless investment charters. Like GEAM, AMR Investment Services has enjoyed long-term realized gains from alternative investments of about 400 to 500 basis points above public-equity-market returns, says Quinn.

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