Hedge fund returns won't save public pensions

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    Mar 30, 2011 8:53 PM GMT
    So, in response to poor(er) historical returns as a result of risks they did not anticipate and underfunding, public union pensions are looking to increase their risk in hopes of a better return. How can they possibly expect this to end well?

    http://finance.fortune.cnn.com/2011/03/30/hedge-fund-returns-wont-save-public-pensions/

    Hedge fund returns won't save public pensions

    State pension funds are putting more of their money into higher risk investments like hedge funds, private equity, real estate, and commodities. But it won't fix their problems.

    As most everyone knows (and as politicians and public workers in Wisconsin, New Jersey, and New York are acutely aware) state and local pension funds could use some big investment paydays. The funds have pension and retiree healthcare obligations that they can't afford to pay.

    Pension fund managers have been pushing to allocate more to alternatives since 2005, hoping that the new strategy would generate higher returns. Academics and public worker unions voiced concern, but hedge funds and private equity seemed too lucrative to ignore as markets rose through 2007.

    With markets rising again, the number of public pension funds that have allocated money to hedge funds has increased by 51% since 2007, according to a study by Preqin; the mean allocation to hedge funds, meanwhile, nearly doubled over the same period to 6.6%.

    The San Diego County Employees' Retirement Association (SDCERA) may increase allocations to approved alternative asset managers, without getting additional authorization, reports HFMWeek. It follows a similar move made last year by the Arizona Public Safety Personnel Retirement System (PSPRS).

    The New Jersey State Investment Council is also jumping in -- it recently voted 8-3 to invest up to 38% of the state's pension funds in an array of alternative investments, up from its current allocation of about 15%. The change could be approved in May.

    But these investment moves don't solve the real problem facing the pension system, says Douglas Forrester, who served as director of pensions in New Jersey in the 1980s. "The current problem is not a result of lower than average investment returns, so higher than average returns won't really make things better," he says.
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    Mar 30, 2011 9:50 PM GMT
    Disastrous idea. Putting that money in the market and assuming outsized returns is a big part of the problem.
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    Mar 30, 2011 11:35 PM GMT
    I wonder who wanted to privatize Social Security in the first place?
    The part on Wing Chau in the Big Short was revealing. He gets paid millions to dump pension funds' hard earned money down the drain. The hubris and idiocy of it all...no wonder he wants to sue the author.
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    Mar 30, 2011 11:52 PM GMT
    q1w2e3 saidI wonder who wanted to privatize Social Security in the first place?
    The part on Wing Chau in the Big Short was revealing. He gets paid millions to dump pension funds' hard earned money down the drain. The hubris and idiocy of it all...no wonder he wants to sue the author.


    Er... hopefully you don't believe everything you read:
    http://www.examiner.com/conservative-in-atlanta/election-myth-does-the-gop-want-to-privatize-social-security

    Insofar as privatization was concerned the options that were proposed were highly conservative insofar as how the investments would run. It would however take it out of the hands of government - which is a big part of the problem now. It's insane that Social Security is unfunded. ie when you pay into the social security "fund" it's not paying for for your own retirement, it's paying for people who are collecting. This works so long as there are a lot more "savers" than people the fund pays out for.

    The problem is that the "fund" that was expected to start going into deficits in 2015-2016 has already started.