Word: pension
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...years since, hedge funds have kept a low profile, but the dollars have poured in. Hedge-fund assets globally have tripled over the past six years to an estimated $1 trillion, a figure growing 15% to 20% a year. This tidal wave of cash increasingly comes from U.S. pension funds--which since 1997 have raised their stake in hedge funds fivefold, to an estimated $72 billion--and from less-than-rich individuals lured by hedge funds' flashy reputation and falling investment minimums, which were once $1 million...
...Pension managers have come to see hedge funds as their salvation in a deadly period for stocks and bonds. Stocks have lost money over the past five years, and with interest rates rising, bonds are seen as a poor bet. "Pension managers simply cannot afford this kind of setback," says Kevin Mirabile, a managing director in the hedge-fund group at Barclays Capital. The typical pension manager counts on annual returns of 8% or more to meet obligations. That's been a nearly impossible standard since the market peaked, and the nation's pension shortfall has widened to $350 billion...
...pension managers are feeling the heat and turning to so-called alternative investments, like hedge funds, in search of better returns. Most hedge funds try to exploit temporary price discrepancies between, say, a barrel of oil and stocks of oil producers, making money as prices fall back in synch--even if the overall markets are sinking. It's a fairly conservative approach--until a hedge-fund manager attempts to multiply profits by borrowing many times over the amount of assets in the fund. Such borrowing is legal, and even expected, but since Long-Term Capital's meltdown, the Federal Reserve...
Better make it two eyes. In a 2003 survey by Fidelity Investments, 56% of pension managers who invest in nontraditional vehicles like hedge funds conceded they did not fully comprehend the risks. Those risks include the high hurdle of arguably extortionate fees and long periods during which you cannot get your money back, in addition to potential bet-the-farm borrowing...
...walk through a gate, then into the building. The room seems a bit too lived-in to be a hotel room. Something might be wrong, I think—but then the pension really is very budget. When is my continental breakfast? And when should I pay, tonight or tomorrow...