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March 12, 2008
Hedge funds attracting pensions, college endowments
Hedge funds globally are attracting more pension funds, foundations and college endowments that seek to diversify assets and boost returns, said Masa Yanagisawa, director at Merrill Lynch & Co. in Tokyo.
U.S. pension funds investing in hedge funds increased by 51 percent in 2007 from a year earlier, while in Japan their number rose by a third, said Masashi Toshino, a senior researcher on the industry at Daiwa Fund Consulting Co. in Tokyo, citing data from Pension & Investments, a New York-based provider of financial industry data, and Japan's Pension Fund Association.
``We're continuing to see strong needs from investors seeking to invest in hedge funds,'' Yanagisawa, 30, who heads Merrill Lynch Japan Securities Co.'s Financing Sales division, which provides brokerage services to hedge funds, said in an interview in Tokyo. ``The investor base is clearly changing and long-term money is starting to flow into hedge funds.''
Faced with increased pressure to boost returns as U.S. subprime loan problems rattle global financial markets, institutional investors, including pension funds and colleges, are putting more money into hedge funds because they take bigger bets and aim to make money in rising and falling markets.
Global Industry
The capital going into hedge funds from global institutional investors is expected to reach $1 trillion in 2010 from about $360 billion, the latest study published by the Bank of New York Mellon Corp. and Casey, Quirk & Associates in October 2006 shows.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
The number of non-traditional hedge fund investors, such as pension funds and university foundations, increased this year at Merrill's sixth Global Hedge Fund Conference in West Palm Beach, Florida, Yanagisawa said, declining to specify the numbers.
Merrill's Financing Sales division provides hedge funds with prime brokerage services such as clearing, custody, securities lending, financing for assets and introducing fund managers to potential investors.
California Public Employees Retirement System, the largest U.S. public pension fund, last June announced plans to double its allocation to activist and hedge funds to more than $10 billion each. The top 200 U.S. pension funds invested a total of $76.3 billion in hedge funds as of the end of September, compared with $50.5 billion the year before, Daiwa Consulting's Toshino said.
Pension and Colleges
Meanwhile, Pension Fund Association, Japan's largest private- sector pension fund manager, allocated 4 trillion yen ($39 billion) to hedge funds as of the end of March 2007, compared with 3 trillion yen a year earlier, according to Toshino.
The best-performing U.S. college and university endowment funds in the year ended June 30, 2007, had more than half of their assets in so-called alternative investments, such as private equity and hedge funds, a Jan. 17 survey by the Commonfund Institute in Wilton, Connecticut, showed. The Commonfund is an investment manager for non-profit organizations in the U.S.
Even so, not all hedge funds are completely shielded from subprime problems and investors must be aware of taking risks, said Toyomi Kusano at Kusano Global Frontier in Tokyo.
`Headwinds'
``Hedge funds are facing one of the strongest headwinds in a decade now,'' said Kusano, president of the research firm that specializes in hedge funds. ``Financial firms are getting tighter with their loans amid the subprime problem and that's inevitably affecting hedge funds.''
Since Feb. 15, at least six hedge funds, with more than $5.4 billion in assets, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.
Hedge funds ``sell themselves on the idea that they can do well in both up and down markets, but this has not been true in many cases,'' said Edwin Merner, who oversees $2 billion as president of Atlantis Investment Research Corp. in Tokyo.
Still, an increase in demand for hedge funds is heightening competition and consolidation among existing funds globally, Yanagisawa said.
Citadel Investment Group LLC, the Chicago-based investment firm founded by Kenneth Griffin, hired Kaveh Alamouti from Moore Capital Management LLC to run a hedge fund portfolio that will trade stocks, bonds, currencies and commodities.
New York-based Millennium Capital Management, the hedge-fund firm run by Israel Englander, bought the assets of London-based Castlegrove Capital to add more investors in Europe. An undisclosed number of Castlegrove's fund managers and employees will join Millennium's affiliate in London.
``We're starting to see bigger hedge funds buying out talents at smaller funds as consolidation accelerates within the industry,'' Yanagisawa said.
-Bloomberg-
Posted by su at March 12, 2008 2:02 PM