Leave your feedback Share Copy URL https://www.pbs.org/newshour/economy/why-are-pension-funds-investin Email Facebook Twitter LinkedIn Pinterest Tumblr Share on Facebook Share on Twitter Why Are Pension Funds Investing in Hedge Funds? Economy Mar 18, 2009 10:31 AM EDT Question: Why were pension funds allowed to “invest” in a hedge fund? Hedge funds are nothing more than gambling. Paul Solman: Because pension funds are supposedly big enough and therefore sophisticated enough to know what they’re doing and take considered risks. Look, all investing is, to a certain extent, gambling, with one big difference: It’s gambling with a positive expected return instead of pure gambling, which is a zero-sum game (as much money won as lost). Gamble through a third party like a casino or state lottery, and the expected return in generally negative, because the house takes a cut. But with gambling, so with investing: The return you anticipate can best be interpreted as a direct function of the odds. If you want the best odds of getting your money back as an investor, invest in a low-risk instrument like TIPS (Treasury Inflation-Protected Securities), as this page has often urged folks to consider doing. (I’m just putting my mouth where my money is: About half of our family financial assets are in TIPS.) The analogue, at a casino, might be betting red (or black) at the roulette wheel. Or betting both, and losing just a little with each spin. TIPS pay only a very modest return: 2 percent or so, plus the inflation rate. Invest in a hedge fund — a largely unregulated private pool of capital from investors with enough money to supposedly know what they’re doing — and you anticipate much bigger rewards. But as any investor ought to realize, that means taking much bigger risks. We're not going anywhere. Stand up for truly independent, trusted news that you can count on! Donate now
Question: Why were pension funds allowed to “invest” in a hedge fund? Hedge funds are nothing more than gambling. Paul Solman: Because pension funds are supposedly big enough and therefore sophisticated enough to know what they’re doing and take considered risks. Look, all investing is, to a certain extent, gambling, with one big difference: It’s gambling with a positive expected return instead of pure gambling, which is a zero-sum game (as much money won as lost). Gamble through a third party like a casino or state lottery, and the expected return in generally negative, because the house takes a cut. But with gambling, so with investing: The return you anticipate can best be interpreted as a direct function of the odds. If you want the best odds of getting your money back as an investor, invest in a low-risk instrument like TIPS (Treasury Inflation-Protected Securities), as this page has often urged folks to consider doing. (I’m just putting my mouth where my money is: About half of our family financial assets are in TIPS.) The analogue, at a casino, might be betting red (or black) at the roulette wheel. Or betting both, and losing just a little with each spin. TIPS pay only a very modest return: 2 percent or so, plus the inflation rate. Invest in a hedge fund — a largely unregulated private pool of capital from investors with enough money to supposedly know what they’re doing — and you anticipate much bigger rewards. But as any investor ought to realize, that means taking much bigger risks. We're not going anywhere. Stand up for truly independent, trusted news that you can count on! Donate now