Casting for Returns

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

A Question of Timing

The question, of course, is whether similar results await investors moving into these markets right now. Many investment professionals wonder whether real estate, for example, is ready for a correction, following the sizable gains recorded in the past few years. While that may be true for some sectors of that market, McInerney cautions against making overly broad generalizations. “There are so many different real estate vehicles, and so many different sectors, that real estate is still being looked at very seriously,” he says.

Both GEAM and GMAM manage real estate investments for their own employers’ pension plans and for other plan sponsors. In June, GMAM, which has been investing in real estate for two decades, launched its Core Plus Real Estate Co-investment Trust, which it developed specifically as a real estate investment vehicle for employee-benefit plans. The trust invests in multiple sectors of the real estate market. GM’s pension plan takes a significant position in each deal, investing side-by-side with its outside clients.

If some investors are wary of the real estate market because it’s been on a roll, others are wary of private equity because it, like the public-equity markets, has been in a slump. Thomson Financial Venture Economics’s Private Equity Performance Index posted a total return of -14.7 percent last year on the heels of a -20.5 percent return in 2001. “People who already have a private-equity program are licking their wounds and keeping their powder dry,” says Ilkiw. “They’re not abandoning their program, just recognizing that there tends to be long cycles in this market.”

Of all the major sectors of the alternative investment marketplace, hedge funds are attracting the most interest right now, says Ilkiw. “When people talk about alternatives these days, that’s really the code word for hedge funds,” he says. Among the types of hedge funds attracting the most attention are those that employ relatively conservative strategies, such as equity market neutral, in which the portfolio manager buys stocks expected to outperform a market or sector and shorts stocks expected to underperform.

GMAM invests in hedge funds, for example, but only at what president and CEO W. Allen Reed calls the “shallow end of the pool” — meaning funds that employ little leverage and fairly conservative investment strategies, including equity market neutral, relative value fixed-income arbitrage, and convertible arbitrage. “What we’re looking for is to create a program with consistently positive returns that are somewhere between the returns available on stocks and bonds,” says Reed.

Caveat Investor

Plan sponsors that have embraced alternative investments, and consultants who advise pension clients on their use, cite a common list of precautions for would-be corporate investors: take a long-term approach to these investments; avoid funding them with assets that may be needed short-term to meet pension liabilities; avoid making large bets on any one deal or manager; and, to mitigate transparency risk, spend a lot of time with your managers to understand their investment philosophy and process (and be sure they stick with them).

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