U.S. public pensions turn to currency as returns sour

Public pension funds are embracing currency hedging to bolster returns that have soured in the past year and to prevent further buffeting from extreme market movements.

With equities and bonds as the main stars of the pension investing world, currency funds, which hedge their assets, have been viewed as an after thought for years. But their track records of stabilising portfolios while adding modestly to returns have caused them to gain traction.

Total inflows to currency managers soared nearly 160 per cent to $13.0 billion in the first seven months of the year from $5.1 billion a year earlier, according to investment data analytics firm, eVestment. That was up from $10.4 billion for all of 2015.

By contrast, global macro hedge funds, which invests in currencies, interest rates and stocks, had outflows of $3.6 billion in the seven-month period amid poor returns, eVestment data showed. They had drawn inflows of more than $9 billion a year earlier.

“In a world of low returns, with movements in currencies generating gains, investing in currency funds has become more attractive,” said Richard Benson, co-head of portfolio investments at Millennium Global Investments in London, which oversees $16 billion in assets.

Public pension systems across the United States (US) are posting their poorest returns since the waning days of the financial crisis due to rock-bottom interest rates and choppy global equity markets. Funds ranging from the $302 billion California Public Employees’ Retirement System, or Calpers, to the $17 billion Kansas Public Employees Retirement System have posted returns below 1 per cent in the last year, far less than targeted levels averaging 7 per cent to 8 percent.

Sluggish global growth and weak inflation have kept bond yields low and will probably continue to do so, driving institutional investors into riskier overseas markets with volatile currencies.

Over the last year, some U.S. public pensions, including the Teachers Retirement System of the State of Illinois, have hired currency specialists for the first time.

Culled from Reuters