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Pension Funds Investing in Hedge Funds, June 15, 2007 1 (June 15, 2007)

handle is hein.tera/crser0173 and id is 1 raw text is: Order Code RS22679 June 15, 2007 ACRS Report for Congress Pension Funds Investing in Hedge Funds William Klunk Actuary Domestic Social Policy Division Summary The proportion of U.S. corporate-defined benefit pension funds investing in hedge funds has increased to 24% in 2006, up from 19% in 2004 and 12% in 2000. Although statistics vary, total corporate pension fund assets allocated to hedge funds in 2006 was 2.l1%. Because of hedge funds' risky nature, rapid growth, lack of oversight, and recent losses, some wonder if they are appropriate investments for workers' retirement funds. In 2004, the Securities and Exchange Commission (SEC) issued a rule requiring many hedge fund advisers to register as investment advisers under the Investment Advisers Act. The rule took effect in February 2006, but in June 2006 a court challenge was upheld, and the rule was vacated. In early 2007, while the Bush Administration called for increased vigilance rather than new government rules to handle industry risks, Congress has asked the Government Accountability Office to examine the use of hedge funds by public and private sponsors of defined benefit pension plans. What is a Hedge Fund? Although there is no precise accepted or legal definition, the term hedge fund generally refers to an entity that holds a pool of securities or other assets, whose interests are not sold in a registered public offering, and that is not registered as an investment company under the Investment Company Act of 1940.' Alfred Winslow Jones is credited with establishing one of the early funds in 1949 by investing in equities and using short selling to hedge the portfolio's exposure to movements in the equity market.2 Today, hedge funds trade in a variety of investment vehicles such as equity and fixed income securities, currencies, derivatives, futures contracts and other assets. Hedge funds often For more information on regulation of hedge funds, see CRS Report 94-511, Hedge Funds: Should They Be Regulated?, by Mark Jickling. 2 A long investment involves buying a stock today in order to sell it in the future; long investors realize a profit if the value of the stock rises. Alternatively, short investors sell stocks first and buy them back at a future date; short investors realize a profit if the value of the stock declines. Brokers facilitate these transactions by loaning stocks to short investors who then sell them on the market. When investors subsequently buy the stock back, they then return it to the broker. Congressional Research Service -f-! The Library of Congress Prepared for Members and Commi0ees of Congress

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