Public pensions are investing more of their money in hedge funds these days in order to boost returns and earn money without hiking contributions from employees or forcing local governments to raise taxes.
The Fire & Police Pension Association of Colorado, which manages roughly $3.5 billion, has channeled 11 percent of its portfolio into hedge funds, the Wall Street Journal reports.
At the start of this year, the pension had no money at all in hedge funds, which invest in stocks, currencies or any other asset class often with borrowed money and engage in riskier trading practices.
"There has been some deserved criticism of hedge funds, but many hedge funds during the market downturn in 2008 did better than the S&P 500," says Dan Slack, the chief executive of the system.
This year, public pensions have allocated 6.8 percent of their portfolios into hedge funds, compared to 6.5 percent in 2010 and 3.6 percent in 2007, according to data-tracker Preqin.
Public pension funds need to do something to offset falling contributions from local governments.
While returns should improve and a shrinking government work force eases the pressure on local governments to make contributions, government payments into public pensions will remain stressed, according to the Boston College's Center for Retirement Research.
Public pension funds last year managed $2.7 trillion in assets, compared with $3.5 trillion in liabilities.
That gap could grow if government employers cut financial support for public pension funds.
"In 2010, employer contributions equaled only 78 percent of the required payments," according to the study, Reuters reports, adding that percentage was down from 84 percent in 2009 and well below the 100 percent contribution level in 2001.
© 2017 Newsmax Finance. All rights reserved.