US defined benefit and defined contribution pension plans had assets of circa $16trn in 2018, according to the OECD. They invest across the full spectrum of commingled investment vehicles, and some have their own separately managed accounts. “There is nothing they cannot choose from, subject to ERISA rules,” says David Cohen, Schulte Roth & Zabel LLP (SRZ) partner in the Employment & Employee Benefits Group. Hedge fund managers could research a wider variety of investment vehicles as a way of diversifying their investor bases and catering for the diverse preferences of tens of thousands of US pension funds.
For instance, collective investment trusts (CITs) date back to 1927, clearly predating ERISA in 1974, 1940 Act funds, and other structures created by legislation in the 1930s. Total CIT assets were circa $3trn at year end 2018, and around 25% of 401(k) assets of circa $5.5trn are in CITs as of end 2017, up from 20% the prior year, according to Cerulli Associates reports.
Hedge funds have usually been wrapped in a Delaware fund, which may run parallel to an offshore fund in, say, the Cayman Islands, which will often be chosen by tax exempt investors as it is tax neutral. These “pure play” hedge funds are widely invested in by US pension funds with in-house teams that can carry out manager selection and pick individual funds. But some US pension funds, including smaller ones, are more likely to choose a “one-stop shop” solution which may be operated in-house or could be externally managed, sometimes as a multi-manager product. This might be a ’40 Act multi-manager fund, or it could be housed in fund structures, including CITs, which can also accommodate dozens of underlying asset managers.
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