Evening Brief – 11.29.23
U.S. Pensions Cut Hedge Fund Exposure
The enthusiasm for hedge funds among US public pension plans continues to dwindle, according to new research from financial data and analytics firm eVestment.
While public plans were about 12 basis points overweight their target hedge fund allocation at the start of 2023, the latest U.S. Public Plan Asset Allocation Report from eVestment indicates a continued reduction in hedge fund exposure, with new commitments drying up in the first half of this year.
The study looked at allocation disclosures supplied by 248 U.S. public pension plans, which managed $4.8 trillion in assets as of the end of 2022, and gauged sentiment for public equities, fixed income, alternatives, and real assets, among other sectors.
The analysis revealed a strong appetite for alternatives last year, with private equity, real assets, and hedge fund allocations all broadly overweight through 2022, owing primarily to outperformance versus public markets, delayed valuations, and the denominator effect.
When digging deeper, the report revealed a growing preference for private market assets over public market exposure in recent years. While hedge fund target allocations fell from 2.8% in 2018 to 1.9% in 2022, interest for private equity increased during the same five-year period, rising from 7.2% in 2018 to 10% in 2022.
Despite a 12 basis point over-allocation to hedge funds last year, eVestment reported that more than 20% of the 107 public plans with designated hedge fund allocations have reduced their targets to zero.
Meanwhile, hedge fund commitments have been sliced in half over the past year from 60 in the first half of 2022, having earlier grown from 41 in the first half of 2021. In dollar terms, those commitments were about $4.3 billion in the first half of 2023, a decline from $8.9 billion the same period a year ago.
“Looking ahead, we find the number of ongoing and potential mandates for both hedge fund and multi-asset strategies uninspiring relative to other public markets asset classes. While we do not want to extrapolate too much from our low sample count, hedge fund commitments spanned multiple strategies including multi-manager, long/short equity, credit, macro, event-driven, volatility trading, and tail risk products,” eVestment noted.
“Assuming an average of 1.63 hedge fund managers are hired per current ongoing and potential mandate – the rate for completed mandates in 2021 and 2022 — we would need 65.3% of these mandates to close and produce commitments at this historical hire rate, alongside the 30 commitments already made during H1 2023, for the total number of commitments to remain unchanged from 2022 to 2023,” the report said.