Public pension funds have poured billions of dollars into hedge funds seeking higher returns, but with the recent market woes, some funds are experiencing double-digit percentage losses, according to the Chicago Tribune.

In July, before the market turned, California’s and New Jersey’s huge pension funds endured mild losses in their hedge fund investments for the month. While many affluent investors are familiar with difficult markets, this will be the first time many pensions have had to weather broad turbulence in their hedge fund portfolios.

“Frankly, we haven’t had much of an opportunity to test it until now,” said Robert Gentzel, spokesman for Pennsylvania’s State Employees’ Retirement System, of the pension’s $8.5 billion hedge-fund portfolio. 

When invested correctly, hedge funds should be able to mitigate losses when markets head south. However, there losses can be more rapid as they rely heavily on borrowed money to make trades.

How pensions’ investments in hedge funds hold up when the dust settles will help determine how they manage these tricky portfolios going forward, industry watchers say.

In July, public pensions appear to have lost only small amounts in their hedge fund portfolios. Calpers, the nation’s largest public pension, lost .3%, while New Jersey’s pension lost around $10 million of its $2.4 billion hedge fund.

Numbers are not yet available, but losses this month are anticipated to be worse. Hedge Fund Research Inc’s HFRX Global Hedge Fund index was down 5% for the month as of last Friday, bringing the index down less than 1% for the year.

Overall, hedge funds have raked in profitable returns for public pensions, and investors will take that into consideration if the funds performance is less than stellar for the month.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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