Pension Risk Matters

Washington Post reporter Tomoeh Murakami Tse writes about the growing number of public pensions with current monies allocated to hedge funds or thinking about making an investment. She quotes Larry Swartz, executive director of the Fairfax County pension funds' board of directors as focused on many factors. "It's about developing a smoother return stream and managing the level of volatility in the retirement system year to year."

In stark contrast, Masachusetts Secretary of State William F. Galvin counters that "There's an inconsistency between the concept behind hedge funds, which is high-risk, high-return, and the concept behind pension funds, which is little risk, guaranteed return."

So who is right? Do hedge funds offer a way to reduce risk or do they instead add risk to a portfolio?

Without knowing more about a particular hedge fund's strategy and quality of  risk controls, it would be hard for anyone to make a blanket statement, one way or the other. What is important is process. Yours truly, Susan M. Mangiero, President of Pension Governance, an independent research and training company, is quoted as saying that survey results suggest that pension funds are too easy on hedge fund managers. "A pension fund manager really needs to ask some tough questions about how the hedge fund is valuing these assets." Importantly, it's not just valuation but a host of other factors that fall into the "must know" category before monies should be committed. See "Public Pension Systems Betting on Hedge Funds" by Tomoeh Murakami Tse , Washington Post, July 24, 2007.)