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Portfolio > Alternative Investments > Hedge Funds

GAO: Warn Pensions About Hedge Funds

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A watchdog agency wants federal pension regulators to give plan administrators more advice about the risks of investing in hedge funds and private equity offerings.

Officials at the U.S. Government Accountability Office say the U.S. Labor Department should come up with guidance for defined benefit pension plan managers, and especially for managers of small pension plans, about the risks of investing in hedge funds and in private equity arrangements, and about strategies for handling those challenges.

“Pension plans invest in hedge funds to obtain a number of potential benefits, such as returns greater than the stock market and stable returns on investment,” Barbara Bovbjerg and Orice Williams, GAO directors, write in a report on the GAO’s views. “However, hedge funds also pose challenges and risks beyond those posed by traditional investments.”

Hedge fund and private equity investors may have little information about the funds’ underlying assets and their values, which could limit the opportunity for oversight, Bovbjerg and Williams write.

“Plan representatives said they take steps to mitigate these and other challenges, but doing so requires resources beyond the means of some plans,” the officials write.

Some surveys suggest that 40% of large and midsize pension plans may be investing in hedge funds and private equity, but no one knows what percentage of plans with less than $200 million in assets do so, the officials write.

Today, pension plan fiduciaries “must comply with a standard of prudence, but no explicit restrictions on hedge funds or private equity exist,” the officials write.

Labor Department officials may be able to draw from the final version of a “best practices” document that a committee formed by the President’s Working Group on Financial Markets expects to publish this year, the officials write.


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