Pension Funds Still Showing Strong Interest in Alternatives

One way to beat rising inflation may be to follow the pension fund managers, and their recent move to invest in alternatives.  In early 2013, pension funds seemed to be leery of alternatives, but as we drew closer to 2014, they began to express a keener  interest (Reuters August 2013).  Nowadays, pension funds are still showing a strong desire to review their alternatives and options, and in doing so that group of investors have begun to increase their hedge fund holdings to record numbers.

Pension funds at one time were considered the most conservative investment group, using only traditional, conservative methods to beat rising inflation, but those times are changing quickly. Nowadays, money managers in pension funds, armed with a good reason to invest in higher yield vehicles, are eager to align with any opportunity that will allow them to recapture lost cash reserves and bolster their individual account funds. Record numbers of fund managers are now working the markets with alternatives, looking for big returns.

With both positive and negative viewpoints expressed by hedge fund managers (and so-called “Gurus” of the investment world), alternatives appear to be more and more suitable as global markets recover and grow. Consider the American City of Detroit’s debacle, where more emphasis has been placed on pension funds by pensioners and the public at large to shore up assets and reserves. At the moment, pension managers in the United States can only account for 73 percent of actuarial obligations.  The need for immediate improvement is increasing daily, as pension reform cries are heard.

At the end of January 2014, Moody's issued a report on several of investors' alternatives. The report, entitled: Asset Managers Stand to Benefit from Investor Shift to Alternative Investments, says that increased allocations to alternatives are likelyto continue, as investors - notably pension funds, search for higher returns. This structural shift by pension funds toward greater alternative investment holdings is a positive development for skilled alternative asset managers, who see it as an opportunity to mitigate the common investing risks that are coomonly associated with alternative investments.

Pension funds are increasingly moving towards alternative investments, which offer higher portfolio returns and better protection against inflation and price volatility,” says Soo Shin-Kobberstad, a senior analyst at Moody's and the author of the report. "In addition, asset classes such as real estate and infrastructure offer long-term asset duration and cash flows that match the profile of pension funds' long-term liabilities.

As in any business, Cash is King, and for pension funds especially, the C.I.F. rule (Cash in Fist) applies, as the Boomers retire in mass numbers. Today, more than 20 million Americans look for their retirement check to be what was originally guaranteed, yet city governments like the States of California and Illinois, and others focus their might on pension reform that limits benefits both now and for future retirees. California went so far as hire a Canadian firm to monitor and move funds towards higher returns. Making cuts to cost of living adjustments, benefit reductions and other strategies are under review, as well as considering the move to alternatives. Closing the financial gap for pensions is a critical need. Higher yields have the ability to shore up shortfalls, despite the elevated risk.

When it comes to choosing from the many investing alternatives for investors, there is never too much experience, research or review. Pension funds have taken a beating over the years, which they now are positioning themselves to fill the financial gap that has begun to swell.

If you seek higher yields, alternative investments may be the key to increased wealth.