Hedge Funds and DC Plans: Happy Together?

The big problem with seeking ever-more exotic asset classes for defined contribution plans isn’t where to find them. It’s where to put them.

In the past couple of years, plan sponsors have become intrigued by illiquid investments like private equity, hedge funds, derivatives and direct real estate, as uncorrelated, diversified counterpoints to the volatile traditional markets. But because it can be difficult to value these complex products — much less explain them to participants who may not even understand a basic equity fund all that well — these asset classes, if its accurate to describe them as such, can’t be part of the regular investment menu. Many managers don’t think they even fit into off-the-shelf target date funds.

So plan sponsors have decided to piggyback onto another growing trend — target date funds that are custom-made for the largest plans.

通过定制基金，“计划赞助商可以控制较少液体车辆的资产配置量，您可以控制现金流量，”州街的全球贡献投资策略全球领导者Fredrik Axsater说全球顾问。通常，计划赞助商主要使用已在其定义的福利和定义贡献阵容中的主要经理创建定制基金资金基金，然后为其劳动力的人口统计量身定制的资产配置。

根据Axsater，一位大型州街客户已经将其定制目标日期资产的“几个百分之几”的自定义目标日期资产纳入对冲基金，并严格考虑该等举措，大约十岁事的大约200名客户。Blackrock与计划赞助商“一对夫妇”的计划赞助商类似的讨论，并为公司美国和加拿大定义捐款集团的投资战略负责人，预计将于年底实施第一个。三座塔Watson客户在他们的自定义投资组合中使用直接房地产。

随着现成的目标日期产品，运动更加谨慎。J.P. Morgan的目标日期线包括一个直接投资于商业房地产的池。Blackrock正在研究是否将非少灯车放入其标准化的目标日期产品中，尽管尼克尔斯表示没有什么可能发生的事情至少六个月。

Market acceptance is one reason for the slow start among off-the-shelf products, Nikles says. By contrast, with a custom target date fund, the plan sponsor may already have exposure to a certain manager.

Indeed, fund managers are looking for all sorts of ways to help sponsors feel more comfortable with these strange investments. For instance, the illiquids usually constitute only about 5 percent of the entire target date portfolio.

For similar reasons, real estate tends to be the most popular type. In addition to its correlation with inflation and usually steady returns (2008 notwithstanding), “it’s a real asset, it has physical holdings, and that makes it easier to communicate to participants,” says David O’Meara, a senior investment consultant with Towers Watson.

J.P. Morgan looked into other illiquid asset classes, says Daniel Oldroyd, a target date portfolio manager there. However, “to get the full benefit of private equity, you would have to have 7 to 8 percent [of the portfolio], and that would get us above our target,” he says.

The small percentage also helps tamp down two of the biggest concerns, liquidity and valuation.

Luckily, experts say there isn’t usually much demand for cash flow. “Target date investors are not the investors that trade frequently,” BlackRock’s Nikles points out. So J.P. Morgan has been able to meet demand by cashing out assets from the more liquid 95 percent of its portfolios, Oldroyd says.

Nikles also suggests creating a liquidity pool within the fund as a kind of mirror image of the illiquid asset, containing liquid assets correlated to the illiquid part. For instance, the mirror-image pool for a direct real estate pool like J.P. Morgan’s could have equity futures or ETF contracts that use real-estate-related companies. The size of the liquidity pool would depend on how active the investors are, but in a target date fund, Nikles says, it would probably be less than half the size of the illiquid part.

The entire target date fund could also substitute for the illiquid part’s lack of daily valuation. “The target date funds themselves will be open on a daily basis,” State Street’s Axsater says. “Given that the illiquid part is such a small component, you don’t have to force cash flow on a daily basis, and you can just true things up on a monthly basis,” when the illiquids are more likely to be valued.

异国情调资产 - 与大多数收藏品一样 - 不要便宜。Oldroyd says that fees on the direct real estate portion of J.P. Morgan’s target date fund are more than 1 percent higher than for the rest — although, he adds, returns have been “a little better” than on the fixed-income portion, at about 7 percent. Depending on the type of asset, the fees for illiquids could be up to twice those of a bread-and-butter index fund, Nikles estimates. To some degree, plans can trim costs by negotiating with their existing defined benefit managers.

In the end, illiquid assets are just another form of risk-return tradeoff. Bonds have proved disappointing. Equities have their own risks. “Investors are increasingly seeking more uncorrelated, more diversified asset classes,” Nikles says.