Pension funds’ love affair with hedge funds is cooling off.
They yanked a collective $6.4 billion from hedge funds in October, the third month this year they have pulled out money, according to a new Trim Tabs/Barclay Hedge report released yesterday.
Although pensions have handed $15.7 billion directly to hedge funds so far this year, that’s still a far cry from last year’s $78.5 billion and $65.7 billion in 2010.
This year’s retrenchment is a bad omen for hedge funds, whose asset growth has been bolstered by direct institutional investment from pension funds in recent years. Since the crash of 2008, these funds — primarily heavily under-funded state and local government pensions — have bypassed funds of funds and put their money directly into hedge funds, hoping to goose returns.
But for the past three years, hedge funds have under-performed the broader market while insider trading scandals continue to plague the industry.
“These institutional investors are not only taking investment risk, they’re taking career risk and headline risk,” said one hedge fund manager, explaining pension funds’ newfound skittishness.
A case in point is New Mexico’s public pension plan, which had been a leader in hedge-fund investment. In October, the fund said it was pulling money from hedge giants including Eric Mindich’s Eton Park and Bruce Richard’s and Louis Hanover’s Marathon Asset Management. Before that, it withdrew money from Paulson & Co., one of the worst-performing hedge-fund firms this year.
New Mexico later decided to reduce the amount of money it allocates to hedge funds by about $300 million, according to Institutional Investor’s Alpha.
New Mexico had also been one of the many public pensions that had invested in Diamondback Capital Management, which last week told investors it was shutting down due to a flood of redemptions in the wake of an insider-trading scandal.
Diamondback founders, who hailed from Steve Cohen’s SAC Capital Advisors, were not charged, but one former employee has pleaded guilty and a second is on trial.
The New York State Common Retirement Fund, which had invested $252.3 million in Diamondback as of March 31, has also pulled its money from the fund.