Pension funds slowed their hedge fund allocations in the third quarter of 2020

Investor sentiment towards hedge funds improved in the first part of the year, but pension funds remain cautious about them, according to a recent report. Pension funds only added to hedge funds they had previously invested in or were familiar with.

Pension funds curb allocations to hedge funds

According to a report by HFM Insights, US public pensions invest mostly in credit and real estate, which accounted for more than 40% of the $2.2 billion in gross hedge fund flows in the third quarter. The company also saw quarter-over-quarter declines in the total value and number of hedge fund commitments to pension funds during the quarter. HFM said a second wave of hedge fund top-ups had not materialized.

The firm also found that more than twice as many hedge fund managers were fired by public pensions as were hired in the third quarter. However, the second quarter was strong for hedge fund retirement allocations, meaning the industry is up in terms of 15-year-old hires to date.

Interestingly, even though the California Public Employees Retirement System (CalPERS) rejected hedge funds, California was still the top US state in terms of the value of retirement hedge fund warrants at $853 million. HFM also said a third of institutional investors in North America view hedge funds more favorably now than they did at the start of the year. Only private debt saw a larger increase in favorable opinions.

Hedge funds were far down the list of commitments for the third quarter

HFM Insights found that private equity was still the top allocation for pension funds in the third quarter with $24.6 billion in commitments. Credit and debt was in second place with $15.1 billion in commitments. Real estate was a distant third with $6.3 billion in commitments, while stocks were in fourth place with $3.7 billion in commitments.

Hedge funds ranked sixth on the list, even below infrastructure and real assets, with $2.2 billion in gross commitments during the quarter. However, hedge funds beat fixed income and multi-asset commitments.

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Of the $10.5 billion in gross year-to-date commitments to hedge funds by pension funds, credit and real estate funds attracted $3.6 billion. During the third quarter, pension funds allocated $900 million to credit and real estate hedge funds, according to HFM.

Hedge funds lose momentum in pension fund allocations

HFM Insights found that private equity continued to gain momentum this year in terms of allocations to pension funds. Between the second and third quarters, pensions increased their commitments to private equity by $10.4 billion.

Credit and debt also gained momentum between the second and third quarters with an increase of $2.4 billion, which includes commitments to credit and debt hedge funds. HFM also saw a $1 billion quarter-over-quarter increase in real estate exposure, including real estate hedge funds.

However, looking at hedge funds as a whole, there was a quarter-over-quarter decline of $1.7 billion in pension liabilities. HFM said repos also sent smaller checks to hedge funds during the third quarter. Additionally, the company said their interviews conducted during the second quarter indicate that most new allocations to hedge funds have been and will continue to be add-ons to funds in which repos are already invested.

Michelle Jones is editor-in-chief of and has worked on the site since 2012. Prior to that, she was a television news producer for eight years. She produced the morning news programs for NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a copywriter and public relations expert for a wide variety of businesses. Email him at [email protected]

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