The Morning Brief: Pension Investors May Cut Hedge Fund Investments, Bank Says

JPMorgan Chase predicts corporate pension plan sponsors will lower their overall hedge fund allocations in a rising interest rate environment as they try to reduce risk, a reversal of recent trends.

In a study examining corporate pension funds, the bank predicts plan sponsors will move away from directionally-oriented hedge fund strategies to strategies with lower correlation, less volatility and minimal beta. More specifically, this means plan sponsors will cash out of equity long-short managers with higher net exposures and equity-focused event driven strategies, and instead boost their allocations to market neutral, global macro and multistrategy funds.

“Plan sponsor de-risking will therefore present a market opportunity for some hedge fund strategies and a headwind for others,” the report states. This is critical, given that corporate plan sponsors account for 19 percent of global hedge fund assets under management, second to public pension plans, which account for 20 percent of the total. The report is based on interviews with plan sponsor hedge fund allocators, chief investment officers and investment consultants in the U.S., Canada and U.K.

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The report also notes that the largest U.S. corporate defined benefit plans quadrupled their allocation to hedge funds over the past five years, with the median allocation averaging 7 percent of pension plan assets, according to data from Wilshire Consulting. The 10 largest corporate plan sponsors have hedge fund allocations ranging from 2 percent of total plan assets to 24 percent. The mean hedge fund allocation among the 200 largest plan sponsors in the U.S. rose from 4.1 percent in 2005 to 7.8 percent in 2014. The report says plan sponsors find hedge funds attractive because they provide strong absolute returns and manage risk in relation to liabilities.

“Additionally, plan sponsors tend to have longer-term investment horizons as a result of their obligations to future retirees,” it adds. “Because plan sponsors’ funding obligations are long-term and often increase over time, it is important for them to avoid significant drawdowns. With their lower volatility and downside protection during times of market stress, hedge funds are therefore a natural complement to plan sponsors’ investment portfolios.”

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Meanwhile, yet another study concluded that size matters when it comes to investing in hedge funds. London-based alternatives data provider Preqin found that the largest hedge funds are the best performers, helping to explain why they receive the bulk of investor money. Funds with more than $1 billion under management generated three-year annualized gains (through June 30, 2015) of about 10.70 percent, better than any other group. Small funds (those with between $100 million and $499 million) gained 10 percent, medium funds (in the range of $500 million to $999 million) gained 9.2 percent, while emerging funds (less than $100 million) rose just 8.2 percent or so. What’s more, the smallest funds also exhibited the highest level of volatility. Altogether, institutional investors account for 66 percent of the $3.1 trillion in industry-wide capital, and more than 80 percent of institutional capital is invested in funds with at least $1 billion under management.

“Owing to their strong risk-adjusted returns, longer track records and greater investor appetite for larger funds, these vehicles can demand higher management and performance fees,” Preqin notes in its report. For example, the largest funds on average charge 1.63 percent of assets and 19.70 percent of performance. Medium funds charge 1.62 percent and 19.73 percent, respectively; small funds charge 1.59 percent and 19.32 percent; and emerging funds charge 1.55 percent and 18.84 percent.

Not surprisingly, 82 percent of large funds and 84 percent of medium-size funds are open to investors, compared with 92 percent and 95 percent for small and emerging funds, respectively.

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Shares of Telenav surged more than 10 percent after Brett Hendrickson’s Nokomis Capital boosted its stake in the location-based platform services provider to 9.1 percent and nominated two individuals to the company’s board of directors. Sure enough, after the market closed, the company announced that it reached an agreement with the Dallas-based hedge fund manager, which had a $363 million U.S. stock portfolio at the end of the second quarter. The board agreed to appoint one of the nominees, Richard Todaro, as an independent director. Nokomis has agreed to customary standstill and voting commitments.

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ESL Partners’ Edward Lampert personally purchased 420,000 shares of Land’s End for a little less than $27 per share, bringing his total stake to 8.78 million shares. Altogether, Lampert and his Bay Harbor, Florida-based firm own 48.5 percent of the retailer, which was spun off from Sears Holdings in April 2014.

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SunEdison is in the midst of another nose-dive after regaining some of its earlier losses. The embattled renewal energy company lost another 2.6 percent on Thursday and is now down 22 percent in the past five trading sessions alone. The hedge fund favorite is down 71 percent since mid-July.