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Portfolio > Alternative Investments > Hedge Funds

Institutions' Sharp Asset Decline Softened by Alte

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GREENWICH, Conn. (–In 2002, U.S. pension funds and endowments recorded their steepest decline in the last three years, possibly the most destructive year in the history of the U.S. fund business, according to Greenwich Associates, a research and consulting firm.

Corporate pension funds were hardest hit, losing on average 14.6% over the year. Public funds had average asset losses of 9.3% from 2001 to 2002. Meanwhile endowments and foundations fared the better, losing 6.3% of their value over the same time frame.

“Looking at the asset mix differences between fund types gives you a sense why they performed differently in the current market,” John Webster, consultant at Greenwich, said in a statement.

What might have worked in the favor of endowments is the fact that they tend to be heavily invested in alternative asset classes, especially in hedge funds. At the same time, Greenwich said that investment in U.S. equities is falling sharply in terms of being proportional to other asset classes. Domestic equity investment fell to 46.8% from 49.4%.

But the future demand for hedge funds is growing as the returns of pension funds worldwide continue to drop and the number of retirees increases worldwide, according to Greenwich. In a white paper released last year, “Alternative Investment Becomes New Choice,” includes findings of interviews of 1,300 pension funds and other institutions in Europe, Japan, Canada and Australia done during the firm’s 2001/2002 research.

Worldwide institutional investors’ hedge funds investments total US$42.8 billion. Currently, the United States leads the pack in the absolute value of hedge fund investments among pension funds and other institutions, with US$34 billion in hedge fund holdings. Japan and Canada are leaders on a percentage basis with 1% and 0.9% of total assets invested in the asset class. By comparison, U.S. institutions on average have only 0.6% of assets in hedge funds.

Greenwich officials report that overall alternative investing in private equity and hedge funds represents a small portion of the whole, with only 7.5% of total institutional assets in the United States being allocated to alternatives.

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