Bridgewater Top Pick Among Public Pension Plans

Bridgewater Associates is the most popular hedge fund among public pension plans. Twenty-one of 150 global pension plans examined by London-based data expert Preqin said they have investments with the Westport, Connecticut firm founded 35 years ago by Ray Dalio. And they certainly are happy customers. Last year, his $37 billion Pure Alpha fund surged a record 44.8 percent after a number of disappointing years of single-digit returns.

The next five most popular hedge fund firms among public pension investors are: K2 Advisors (19), Grosvenor Capital Management (17), Pacific Alternative Asset Management (12), GAM (12) and Blackrock Proprietary Alpha Strategies (11).

The ranking was contained in a larger report that found the number of pension funds investing in hedge funds increased by more than 50 percent since 2007, from 196 to 295. In addition, during the same period, the average allocation to hedge funds has nearly doubled, to 6.6 percent of total assets in the first quarter of 2011 from 3.6 percent in the fourth quarter of 2007.

As a result, hedge funds are more popular among public pension funds than private equity, which currently has a mean allocation of 5.5 percent of total assets, according to Preqin. Altogether, the total amount of public pension assets currently invested in hedge funds is $127.3 billion, according to Preqin.

Among investors who made initial allocations to hedge funds in 2010: UK-based Port of London Authority Pension Fund and the Denver Employees’ Retirement Plan.

Although more and more institutional investors in general are moving toward making direct investments in hedge funds, the Preqin study found that 80 percent of public pension funds which made their first investments in 2010 did so through multi-manager allocations. What’s more, 70 percent of all public pension fund investors in hedge funds have some exposure to funds of funds.

Public pension funds are a very appealing asset class for hedge funds. The 10 largest investors in hedge funds alone have more than $836 billion in assets under management, according to Preqin.

What’s more, public pension funds have more modest expectations than other investors. For example, their annual return expectations from hedge funds are currently 6.2 percent. This is at the lower end of a narrow band that bottomed at 6 percent in 2007 and peaked at just 6.7 percent in 2008. In contrast, Preqin has found that all investors expect to see 6.9 percent returns from hedge funds, down from 9.8 percent in 2007.

Preqin says public pension funds allocate to other types of alternative assets such as private equity to boost returns and frequently use hedge funds for diversification and stability within their alternatives portfolio.