Workplace Issues

401(k) Plans Investing Like Hedge Funds

Some target-date retirement funds are using hedge fund strategies to limit downside risk.
Matthew HellerDecember 9, 2014
401(k) Plans Investing Like Hedge Funds

Retirement plans that offer target-date funds are increasingly using hedge-fund type strategies to protect themselves against downside risk, Reuters reports.

Target-date funds, which allow savers to invest based on their expected retirement year, account for a growing share of U.S. retirement plans. About 41% of 401(k) plan participants now invest in them, compared with 20% five years ago, according to the SPARK Institute, a retirement plan lobbyist.

And among those that manage target-date funds, 14% had allocations to hedge fund strategies, up from 10.5% three years ago, according to retirement plan consultant Callan Associates. The median target date fund allocation to hedge fund strategies rose to 5% in 2013, from 1.86 percent in 2011.

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Reuters cited the strategies of BlackRock, the world’s largest asset manager, and Manning & Napier, which have been shorting stocks and trading derivatives in their target-date funds.

“It is really the only sensible way to give these investors exposure to alternative investing,” Jim Phillips, president of the Retirement Resources consulting firm, told Reuters.

Employers have been able to automatically enroll employees in target-date funds since 2006. While a hedge-fund style strategy can be more expensive and riskier than just buying stocks and bonds, it can act to absorb some of the shock from events like the 2008 financial crisis.

The performance of many target-date funds plummeted during crisis because they were too heavily exposed to stocks and are turning to hedge strategies to prevent that from happening again, Callan’s Lori Lucas told Reuters.

Asset managers say the true value of adding alternative strategies will not prove itself fully until equity markets stumble.

“These strategies have not helped in the bull market but tough times will be the litmus test,” Jeff Coons, president and co-director of research at Manning & Napier, told Reuters. The firm manages about $50 billion in retirement assets, including about $768 million in target-date funds.

Source: Reuters

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