A heaping plate of cognitive dissonance via New York Times:
One reason pensions turn to hedge fund managers is to try to close the expansive gap between what the pensions owe their beneficiaries and the amount of funds that they have to meet those obligations. According to a report by the Pew Charitable Trusts, that gap was around $1 trillion in 2013, the most recent year available.
Whether hedge funds can actually help fill pensions’ coffers is the question responsible trustees must try to answer. Few are financial wizards, so it’s hard for them to truth-squad the sophisticated sales pitch.
Let me help you out: As Nick Murray says, anything that suppresses volatility also suppresses returns.
Hedge funds, by definition, are supposed to suppress volatility (although many of the well known ones are amplifying it these days – another topic for another time). Ergo, no – the addition of hedging will not fill the gap between equity / bond returns and the needed returns of pension funds.
In many cases, it will actually make it worse, we have learned. Low returns and high costs are a recipe for failure based on virtually any financial plan or pension liability.
As more and more institutional investors figure this out (or admit it to themselves), people like my colleague Ben Carlson will have their work cut out for them.