Compliance

11:19 AM
Justin Grant
Justin Grant
Commentary
Connect Directly
Google+
Twitter
RSS
E-Mail
50%
50%

Scranton, San Jose Show How Mainstream Hedge Funds Have Become

One city is looking for a loan and the other is looking to boost returns, but both cases indicate that hedge funds have moved from an alternative into the mainstream.

Alternative investments have officially entered the mainstream.

In a bid to improve sagging returns, a pair of pension plans in San Jose, California are looking to invest $730 million in hedge funds within the next six to 12 months, according to Bloomberg Businessweek. The publication says the City of San Jose's Police and Fire Department Retirement Plan, along with the Federated City Employees' Retirement System, are looking to invest in 15 to 20 hedge funds. The piece notes that the pension funds will first look to find multi-strategy funds to invest in, but that they will eventually look to add relative value, event-driven, long-short equity and macro funds to their respective portfolios.

From Bloomberg Businessweek:

The initial allocation to each manager selected is expected to be about $50 million, Bill said.

The pension plans seek to create a diversified, global portfolio, he said. They are looking for managers that are uncorrelated to traditional market indexes and that will provide low portfolio risk to minimize losses in falling markets. The pensions are targeting a return of Libor plus 5 percentage points for the absolute-return portfolios, with annualized volatility of 4 percent to 11 percent.

But city governments aren't just turning to hedge funds to manage their employees' retirement accounts. For cash-strapped cities whose finances are too shaky to convince conventional banks they're a worthy credit risk, hedge funds are shaping up to be a realistic Plan B. Last month it was reported that Scranton, Pennsylvania's city council was in serious discussions to borrow $18.5 million from hedge funds to close a gap in its budget.

However such a loan would likely come at a steep price for Scranton. Andrew Schneider, director of the Hedge Fund Association, told the Scranton Times Tribune that in this case, a hedge fund would likely borrow money at 2 percent and then lend it to the city for much more.

Cases like Scranton's are still rare and this is something of a last resort for a bankrupt city. But both San Jose and Scranton's stories are a worthy indicator of just how mainstream hedge fund investments are becoming.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Shared Reporting Services on the Horizon, Genpact Predicts
The financial services industry is starting to adopt shared services, resulting in reasonable impacts to the bottom line. Genpact expects a push for reporting efficiency will come next.
Don't Let the Cloud Rain on Your Operations Strategy Parade
Avoid migrating large applications all at once to minimize risk during a cloud project.
Could Intel Lose Data Center Market Share to ARM Chips?
ARM chips could be an alternative for certain purposes in the datacenter, but many questions have to be answered before they pose a threat to Intel's market dominance.
Cost to Trade: Hey, Banks, Itís Time to Face the Music
Why is calculating the cost to trade so difficult for banks? The answer is as complex as the calculations themselves.
M&A Activity Will Continue to Grow in 2015
Data shows that the M&A market continues to improve, and forecasts indicate deal making will be healthy in 2015.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.