07/24/2013

JP Morgan’s Pension Quitting Hedge Funds

J.P. Morgan, among the world’s largest fund managers, is liquidating all of the hedge fund investments held by its $13 billion pension.

The plan is for J.P. Morgan Retirement to withdraw some $2.3 billion it has invested in funds spread out among about 30 managers. The move calls into question the future of managing director Renee Kelly and her team, who manage the pension’s hedge fund portfolio.

J.P. Morgan units including Highbridge Capital manage $26.5 billion of regulatory assets, including leverage, according to Hedge Fund Alert’s Manager Database, which tracks fund operators registered with the SEC. The bank claims to manage $43 billion of hedge fund assets worldwide.

So why is its retirement plan giving up on hedge funds? At a time when many pensions are struggling to make up for asset shortfalls, J.P. Morgan’s plan is overfunded, at 117% as of Dec. 31. With a hefty surplus, the bank wants to reduce risk by shifting assets into traditional fixed-income investments.

A source who works closely with institutional investors said it appears J.P. Morgan wants to “immunize” its pension plan by pulling back from hedge funds and traditional equity investments.

Another source said Citigroup made a similar move several years ago, scaling back a hedge fund portfolio that amounted to 10% of its overall pension assets. At the time, Citi’s retirement plan also was overfunded.

“If you can use fixed income to offset your liability stream, then there is no need for directional strategies like equities, or [to be] levered like hedge funds,” he said. “Underfunded plans need to assume more directional risk.”

At yearend 2012, Citigroup’s retirement assets totaled $12.7 billion, or about 96% of its obligations.

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