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.

40% of Pensions Considering Alternative Assets to Reduce Risk

A global financial marketplace that has been in recovery mode for the last five years is regarded by most to be a challenging, volatile climate for investment. On the other hand, there are those who believe that it is an opportunistic place for investment-seekers to build a portfolio. For instance, the traditional investing strategy, which consists of buying and selling stocks, bonds, real estate etc.; has not been as profitable in today's uncertain economic environment. Because of this ongoing poor performance, 40 per cent of pension funds are considering moving a larger portion of their funds to alternative assets (Aon Hewitt survey), to capitalize on new opportunities that will reduce their portfolio's exposure to common investment risks and influences; like inflation and interest rates.

The Aon Hewitt research clearly illustrates that there is an increasing willingness of trustees and advisers to consider a wider range of asset classes, than has historically been the case before. The data further suggests that trustees are now much more prepared to accept that investing in alternatives has both a key role to play in reducing portfolio risk and may also offer the chance of producing very attractive returns. It also seems that pension funds are more prepared to hire third party expert consultants to expand their range of investment options.

The fact of the matter is that alternative assets have repeatedly demonstrated they are an excellent option to help investors beat rising inflation and reduce risk in their investment portfolio. And although private investors may have started the movement toward alternative investments post-2008, an increasing number of pension funds, financial institutions and investment banks have been swift to re-allocate their capital to the growing list of alternatives, in an effort to provide clients with long-term capital growth and lower their over-all exposure to risk.

Retirement: Hard Assets Versus Pension and Personal Savings

In most developed nations, retirees depended upon an approach that is known as the three-legged stool. This strategy for retirement includes a pension, social security and personal savings. However, people are beginning to see that their stool actually has only one leg ... their personal savings.

In regards to the safety or security of a pension, most companies and governments have easy access to the retirement funds. For example, the Treasury and the European Stabilization Mechanism (ESM) have full access to  pension money, and can use it as a source of raising capital. Furthermore, the United States' social security is on the brink of insolvency, and its days are numbered; as well. With that being said, it is understandable why these actions would create uncertainty in most people, who are desperately trying to save for their retirement. But that's not all ...

In a credit-induced community, their isn't much hope for personal savings either. The Employee Benefit Research Institute reported in March 2012, that 60 percent of American workers revealed that the total value of their savings and investments, is less than $25,000. The three pillars of retirement income for citizens in developed economies – Social Security, private pensions and savings, appear to be on shaky ground and quickly becoming a growing concern for hard-working people and apprehensive investors all over the world; who are actively seeking alternatives to common investments and traditional investing.

One of the first things individuals must do immediately to strengthen their retirement system, is to invest their money in hard assets. Usually, hard assets are non-perishable real (tangible) assets and include real estate and commodity-related assets, such as energy (oil and gas), precious metals (gold and silver), industrial metals (aluminum and copper) or timber; and often function as a  key part of most people's retirement strategy. As simple as it may sound, investing in hard assets is not like investing in stocks or bonds, and there are many alternatives for confused investors; each with its own benefits and rewards.