Hedge Funds Are No Shortcut to Easy Money for Pension Funds

A blog about business and economics.
April 2 2012 8:46 AM

Hedge Funds Are No Shortcut to Easy Money for Pension Funds

We've seen previously that hedge funds are more profitable for managers than investors, and the same is true of private equity. Now it looks like large pension funds that have invested in non-traditional asset classes are finding the same thing: "But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees."

One basic problem with pension fund investments in hedge funds is that you're piling principle-agent problems onto each other. You have a bunch of people working, earning lower wages each and every week in exchange for the promise of a pension when they retire. Then you have some guys who earn an income managing the fund's money. Then those guys hand some of the money over to some other guys who earn an income managing the money that the other managers handed over to them. It's very possible to turn this into a winning arrangement for everyone involved except the worker who was hoping for the pension and/or the taxpayer who ultimately finances the bailout when the whole thing crumbles. What you want to do is save a healthy share of your income and invest it in a nice low-fee index fund and hope for the best.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.