The enactment in August 2006 of the Pension Protection Act brought an added measure of security to employees’ pension investments, but the law has taken on a different hue lately in light of seemingly interminable waves of market volatility. The act’s main provisions require companies to value investments based on current worth — the mark-to-market rule — and to make payments to plans that are underfunded as a result. Many fund administrators say that the law puts them in an impossible position. One retirement plan provider, Pentegra Retirement Services, is ramping up its fund-of-hedge-funds exposure as part of its effort to adapt.
“That’s really what’s driving the change,” says Frederic Slade, senior investment analyst at the White Plains, New York–based firm, which is an independent program provider that manages about $2 billion in defined benefit plans for roughly 250 employers (mostly regional banks and credit unions). Founded in 1943, Pentegra first ventured into hedge funds in 1990 by investing 2 percent of its assets in the industry. That allocation has since grown to 10.3 percent, with assets divided among seven funds of hedge funds. Two of the funds collectively command about half of Pentegra’s $200 million allocation: One is managed by New York–based Barlow Partners, and the other by Boston-based State Street Global Advisors’ Absolute Return Fund. Slade says the fund plans to hire at least one more fund-of-funds manager this winter.
The rest of the Pentegra portfolio is divvied up among bonds (27.5 percent), equities (20.3 percent), enhanced indexed equities (13.5 percent), indexed bonds (11.5 percent), cash (9.6 percent), European, Australian and Far East equities (5 percent), real estate (2 percent), venture capital (0.2 percent) and private equity (0.1 percent). This breakdown delivered a 10.0 percent loss for the first nine months of 2008 (by comparison the Standard & Poor’s 500 index lost 19.29 percent). Annualized three- and five-year returns were 2.70 percent and 5.10 percent, respectively, through September 30 (versus 0.22 percent and 5.17 percent for the S&P 500).
Slade concedes that because of heightened liquidity concerns, hedge funds are a less-than-ideal investment at the moment. This is especially so for an organization like Pentegra, which pools clients’ assets and liabilities into one master fund and manages the collective investments to the overall liability. The firm must be prepared to meet redemption requests immediately because member companies can, and sometimes will, pull out of the plan without warning. Investments in stocks and bonds are usually more easily redeemed than those in hedge funds, Slade notes, but he adds that at the end of the day, hedge funds are worth it.
“Certainly, liquidity is a concern,” he says. “But the return objective we have for hedge funds somewhat offsets that.”
