Pension funds turn to alternatives under market pressure
The BlackRock Investment Institute is advising investors to shift part of their portfolios from developed market government bonds into hedge funds, citing potential diversification benefits for retirement plans where low yields continue to weigh on fixed income strategies.
In a note released Thursday, the institute recommended that investors raise their exposure to hedge funds by as much as 5% from current levels. This represents the highest allocation guidance the research arm of the asset manager has issued.
Accoording to BlackRock, investors who are cautious on risk could consider reallocating assets from bond holdings into hedge funds with lower risk profiles. Investors who can tolerate more risk may adjust a portion of their equity exposure to higher risk hedge funds.
BlackRock’s asset management business, which facilitates investor access to hedge fund strategies, manages $76 billion in hedge fund-related assets, including direct hedge fund investments and affiliated businesses, according to the company’s website.
Policy changes have created additional avenues for retirement portfolios to consider hedge fund allocations. In August, then-President Donald Trump signed a White House order instructing regulators to allow 401(k) retirement plans to include alternative investments such as hedge funds.
The directive introduced a new investment category for defined contribution plans. BlackRock, which supported the policy effort, has disclosed plans to introduce a retirement fund next year that will include private equity and private credit.
Industry data shows hedge funds have delivered positive performance this year. According to PivotalPath, hedge funds returned 1.1% in July and gained 5.2% year-to-date through July 31. Over the past five years, hedge funds have returned about 8% annually on an annualized basis.
In comparison, U.S. equity markets have produced higher returns so far this year, with the S&P 500 and Nasdaq indexes both up between 9% and 10%. On the fixed income side, JPMorgan’s global government bond fund posted a 2% return as of July 31, according to the bank’s website.
Recent research suggests pension funds are already reconsidering allocations to alternative assets. Benefits and Pensions Monitor earlier reported that plans are realigning private equity allocations to address liquidity and duration pressures, often targeting 25% to 40% of portfolios. Moreover, stagflation risks were pushing funds to reassess large private equity strategies that have become more correlated with broader markets.
Other shifts in strategy have been documented earlier this year. Last April, Canadian plans were reported to move toward co-investments, secondaries, and partnerships with active managers, with liquidity as a central consideration. In June 2024, it was also reported that alternatives such as real estate, infrastructure, private equity, and private debt remain central to pension fund portfolios seeking to manage lower yields in fixed income.
BlackRock’s latest recommendation adds to these ongoing discussions within the pension sector on how hedge funds and other alternative assets may be positioned alongside bonds and equities in retirement portfolios.
