According to GAO’s most recent report about the issue, most of the 22 plan representatives GAO interviewed said their hedge fund investments met expectations overall, despite, in some cases, significant losses during the financial crisis. A few plan representatives, however, expected hedge fund investments to be much more resilient in turbulent markets, and found the losses disappointing.
Some plan representatives described significant difficulties in hedge fund and private equity investing related to limited liquidity and transparency, and the negative impact of the actions of other investors in the fund—sometimes referred to as co-investors. For example, representatives from one plan reported they were unable to cash out of their hedge fund investments due to discretionary withdrawal restrictions imposed by the fund manager, requiring them to sell some of their stock holdings.
In 2011, GAO issued a report contending that hedge funds and private equity investments pose a number of risks and challenges beyond those posed by traditional investments (see “GAO Expresses Concerns about DB Alternative Investments“). The agency said most plans included in its review have taken actions to address challenges related to their hedge fund and private equity investments, including allocation reductions, modifications of investment terms, and improvements to the fund selection and monitoring process.
Most plans GAO contacted have maintained or increased their allocations to alternative investments. However, most plans have also adjusted investment strategies as a result of recent years’ experiences. For example, three plans have reduced their allocations to hedge funds or private equity. Other plan representatives also took steps to improve investment terms, including more favorable fee structures and enhanced liquidity. However, some plan representatives and experts indicated that smaller plans would likely not be able to take some of these steps.
The GAO previously recommended that the DoL publish guidance for plans that invest in alternative assets, but to date, it has not done so, in part because of a concern that the lack of uniformity among such investments could make development of useful guidance difficult.
In 2011, the DoL advisory body specifically revisited the issue of pension plans’ investments in hedge funds and private equity, and a report is expected in early 2012.
The GAO report can be downloaded from http://www.gao.gov/products/GAO-12-324.