Hedge funds key piece of OPERS portfolio

The Ohio Public Employees Retirement System has a well-diversified investment portfolio. In addition to traditional investments such as stocks and bonds, OPERS makes use of alternative investments to secure retirement benefits for its members.

At the August Board of Trustees meeting, the OPERS investment staff and the Board’s alternatives investment consultant, Aon Hewitt, provided a primer on the role of hedge funds in our portfolio.

OPERS has 8 percent of its Defined Benefit Fund and 6 percent of its Health Care Fund invested in hedge funds, about $7 billion of the nearly $90 billion total. Hedge funds are investments that use diverse strategies and expertise to take advantage of unusual opportunities to generate alpha, or outperform.

There is a perception that hedge funds are, by nature, high-risk investments. In fact, they often are designed to reduce risk. A diversified portfolio of hedge funds across a variety of strategies (macro, relative value, equity long/short, etc.) is designed to provide consistency to our return expectations by exposing the overall portfolio to less risk than simply putting more money into stocks and bonds.

“Hedge funds actually produce some of the more stable returns over time,” Aon Hewitt consultant Peter Hill told the trustees. He said that over the past 15 years, hedge funds have become more widespread in institutional portfolios, more transparent and better regulated than in the past.

OPERS currently works with 31 hedge fund managers that employ five types of investment strategies (multi-strategy, equity hedge, event-driven, relative value, and macro).  Aon Hewitt research shows that broad indexes of hedge funds have significantly outperformed the S&P 500 since the turn of the century. Both investment types easily have outperformed Treasury bills.

Hedge funds are constructed to offer more protection in the case of down markets than stocks or bonds alone. From January 1990 through March of this year, hedge funds had an average monthly loss of 0.75 percent during 108 negative months for the S&P 500. The S&P 500 index averaged a monthly loss of 3.55 percent during that time.

Over the 12 months through June 30, OPERS’ hedge funds returned 3.4 percent, outpacing our custom investment benchmark as well as the HFRI Fund Weighted Composite Index of more than 2,000 funds.

For more information, refer to the OPERS 2015 Annual Investment Plan on our website.

Michael Pramik

Michael Pramik is communication strategist for the Ohio Public Employees Retirement System and editor of the PERSpective blog. As an experienced business journalist, he clarifies complex pension policies and helps members make smart choices to secure their retirement.