Orin Kramer, the chairman of the board that oversees New Jersey’s public pension system (and himself a hedge fund manager), says he got a call from a reporter a while back asking him whether pension fund managers could ever be expected to “understand hedge funds in the way they do GM or GE.” That got a little bit of a laugh from the crowd here in Beverly Hills (at the Milken Institute Global Conference). Then Kramer continued:
If you randomly selected hedge funds using Braille, or picking every sixth name, you had multiple levels better performance than if you picked GM and GE.
Yet it remains much more politically risky for government pension funds to invest in hedge funds than in stock—even in the stocks of “levered blind pools of capital,” which is how Kramer described banks. “No hedge fund can get anywhere near the level of leverage that banks have,” he said.
Now the comparison isn’t perfect: most pension funds have hugely diversified stock holdings, whereas it’s not practical for them to own hundreds or thousands of hedge funds. But still, it is weird the way hedge funds continue be portrayed as bringing big risks into pension and endowment portfolios. It may still be a bad idea to invest with them because of the high fees they charge. But are they inordinately risky? No, not really.