The Markets January 17, 2009

Hedge Fund Best Practices Study Panels Release Final Reports

Two private-sector study groups have released a finalized version of a series of industry best practices for asset managers and hedge fund investors designed to increase industry accountability for participants.
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According to a news release, the two study panels were established by the President’s Working Group on Financial Markets (PWG).

The asset managers document calls on hedge funds to adopt comprehensive best practices in all aspects of their business, including disclosure, valuation of assets, risk management, business operations, compliance, and conflicts of interest.

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“Given all of the events of recent months, it is more important than ever for the hedge fund industry to stand behind a set of far-reaching best practices that will promote investor protection and reduce systemic risk,” said Eric Mindich, CEO of Eton Park Capital Management, who chairs the Asset Managers’ Committee, in the announcement.

Meanwhile, the best practices for investors includes a Fiduciary’s Guide providing recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio, and an Investor’s Guide, which provides recommendations to those charged with executing and administering a hedge fund program.

“These final recommendations can provide an important tool to those who are doing the diligence necessary to assess and monitor investments in hedge funds,” said Gary Bruebaker, Chief Investment Officer of the Washington State Investment Board, in the news release

The committees’ work was based on a February 2007 PWG document, which sought to enhance investor protections and systemic risk safeguards. The PWG includes the heads of the U.S. Treasury Department, the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

According to the news release, the Asset Managers’ Committee includes representatives from a group of hedge fund managers representing different investment strategies. The Investors’ Committee includes representatives from labor organizations, endowments, foundations, corporate and public pension funds, investment consultants and non-U.S. investors.

The two reports can be found at www.amaicmte.org.

In Practice January 17, 2009

Cerulli Projects 5.9% Growth in DC Assets

The growing popularity of automatic enrollment in defined contribution plans – and target-date default choices in those plans – should fuel a surge in retirement plan assets, according to a new report.
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According the recent Cerulli report, “Cerulli Quantitative Update: Retirement Markets 2008″, private-sector DC will grow at an annual rate of 5.9% from 2008 to 2013, though that is a lower rate compared to previous projections based on worsening net flow forecasts, according to the report. Going forward Cerulli forecasts slower growth in private DB than public DB, with private DB growing at an annual rate of 3.6% through 2013 and public DB growing at a rate of 5.3%.
“As more DB plans freeze due to extreme financial pressure, plan sponsors will look to improve the DC plan to help their employees achieve retirement security. With the secular private sector shift to DC continuing, aggregate contributions will be stronger in the 401(k) industry than in DB,” says DJ Lucey, Senior Analyst in Cerulli’s institutional asset management practice, and co-author of this report.
Equity Allocations
Fueling at least some of the growth in DC plans is the higher equity allocations associated with target-date funds, compared with traditional participant-directed choices, and with the types of default choices prevalent prior to the Pension Protection Act (PPA) and the subsequent regulations on qualified default investment alternatives, or QDIAs. “Lifecycle funds as a default option will increase the allocation to equity when compared with stable value as a default option, and the equity market premium will cause assets to grow more quickly,’ says Jake Hartnett, Analyst and co-author of the report.
“We also expect that auto-enrollment and auto-escalation will be adopted by more plan sponsors which will have a positive effect on 401(k) inflows. This will be somewhat offset by the near-term macro economy putting negative pressure on retirement savings,” comments Tom Modestino, Senior Analyst in Cerulli’s retirement practice, and another report co-author.
However, the retirement plan vehicle with the highest projected growth rate over the next 5 years are individual retirement accounts (IRAs). Cerulli projects that the 5-year compounded annual growth rate (CAGR) for IRAs is expected to be 8.5%, surpassing other retirement segments such as private defined benefit (DB) and DC programs, as well as public retirement markets.
Not that that represents a change in the trend. In fact, the report explains that growth in IRAs is a continuation of a trend already in place, as the trailing 5-year CAGR in IRA is also the strongest of qualified retirement savings vehicles.

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