Status Report: Institutions Increasing Allocations to Hedge Funds

According to an article at Pensions & Investments, several pension funds are increasing their portfolio allocation to hedge funds.  The favored strategies are equity long/short and credit strategies.  Florida State Board of Administration, State of Wisconsin Investment Board and North Carolina Retirement Systems have invested in equity long/short.  The funds winning these mandates can be found here.  Despite negative returns for equity long/short in the HFRI Equity Hedge Fund index for 2011, investors are not planning any withdrawals.  The total amount being invested is $2.5 billion.

There are several reasons for institutions to increase their allocations:

• Hedge funds are no longer a discrete asset class but are classified as equity or fixed income based on their holdings
• Equity long/short funds reduce the volatility of returns
• Fixed income long/short funds generate excess returns (alpha) on the long and short sides of trades