<p>sm74, love the article . Thanks for posting it.</p>
<p>2 and 20…tough to get great returns with fees like those…</p>
<p>"James Montier of GMO, an asset-management firm, argues that pension schemes have been pushed into the hedge-fund world by weak past (and likely future) returns from traditional asset classes. If valuations return to the mean, a benchmark portfolio split 60/40 between equities and government bonds will return just 4.5% annually over the next seven years. That is not enough to pay for pension promises, so funds decided to follow the example of Yale University, whose endowment diversified into hedge funds and private equity in the 1980s.</p>
<p>Alas, like the supposedly dumb small investor, the pension funds ended up chasing past performance. The flood of money into private equity caused more competition in the world of buy-outs, with the result that deals were done at higher valuations. Those higher valuations have duly led to lower returns.</p>
<p>Another rationale for the move into alternative assets (as hedge funds and private equity are known) is that returns are uncorrelated with those on other assets. But Mr Montier points out that the correlation of returns from different hedge-fund styles (which invest in a wide range of assets, from corporate bonds through to equities) has risen from around 0.3 in 1993 to 0.8 in 2009. Given that 1 would represent perfect correlation, that implies most hedge-fund styles are rising and falling in near-unison. As Mr Montier remarks: “It would appear as if all the hedge funds are doing exactly the same thing—riding momentum or selling volatility.”</p>
<p>It is all reminiscent of the “search for yield” in the past decade, which saw investors ignore risk as they piled into structured products linked to subprime mortgages. This chase for higher returns may not prove quite so disastrous. But it is more likely to reward hedge-fund managers than their clients."</p>