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Portfolio > Alternative Investments > Hedge Funds

ERISA Ponders Alternatives

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The Employee Retirement Income Security Act of 1974 (ERISA) has been a provision most hedge fund managers have sought to avoid. However, as more pension fund money has been flowing into hedge funds–catching the eye of the Securities and Exchange Commission and perhaps pushing the move to manager registration–legislators have acted to ease pension fund access to hedge funds.

ERISA was introduced to provide workers with more secure pensions following market downturns in the early 1970s that jeopardized corporate retirement programs. Now, as pension plan liabilities are on the rise and overall stock market rates of return have fallen, legislators seem eager to give trustees more leeway to invest in hedge funds.

The Pension Protection Act of 2005 (HR 2830) proposes a number of changes to the U.S. corporate pension structure, not the least of which raises the amount of ERISA plan assets hedge funds can handle before being required to comply with the Dept. of Labor’s ERISA guidelines that apply to all traditional pension plans.

The measure allows for up to 50% of a hedge fund’s assets to be from ERISA-governed plans, up from the current 25% threshold. The new legislation also defines specifically what type of plan assets are counted toward that threshold, saying that only the assets of ERISA-governed employee benefit plans are included in the asset percentage. This provision excludes foreign pension plans and government retirement programs, which currently are included when a manager is monitoring ERISA plan asset holdings.

ERISA compliance terms have meant that managers automatically become fiduciaries once 25% of their assets are from ERISA plans. This fiduciary responsibility requires them to act prudently in managing pension plan money.

Hedge funds that have made the effort to accept ERISA money have generally offered feeder funds that funnel money to a master fund and then on to a fund specifically for pension fund investors only. But now hedge fund managers should have an easier time accepting pension fund money, if the proposed legislation becomes law (the House passed the measure on December 15 and sent it on to the Senate).

“I would not be shocked to know that some of the big pension plans are behind this,” said Jane Buchan, managing director of Pacific Alternative Asset Management Co. About half of her firm’s $7.2 billion in fund-of-funds assets are from ERISA plans, and with that in mind, PAAMCO has always dealt with managers who were comfortable with ERISA fiduciary guidelines.

The Washington-based hedge fund lobbying group Managed Funds Association did push the House Committee on Education and Workforce to address the ERISA 25% threshold in a letter on June 3.

“Capital formation, which is a vital benefit provided by the alternative investment industry, is being hindered because foreign plans and public plans alike are unwilling or unable to invest, or funds are unwilling to accept, capital in which ERISA plans happen to invest, even in nominal amounts,” MFA President John Gaine wrote to legislators.

The bill has had bipartisan support and was backed by the United Auto Workers and the United Brotherhood of Carpenters & Joiners of America unions as well as the U.S. Chamber of Commerce and the Financial Services Roundtable.–Susan L. Barreto and Jeff Joseph

Susan L. Barreto is a Senior Financial Correspondent at HedgeWorld. Jeff Joseph is managing director of Rydex Capital Partners and serves on the advisory board of HedgeWorld (, a global provider of hedge fund information and investment products.

Have a hedge fund question? Contact Jeff Joseph at [email protected].

For inquiries about HedgeWorld’s services, e-mail [email protected].


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