Hedge Funds

Public pension funds are beginning to invest more of their assets in high-risk hedge funds, the Washington Post reports.

With a flood of baby boomers set to retire in coming years, pension funds across the country are shedding their stodgy stocks-and-bonds-only portfolios and ratcheting up investments in hedge funds. The move comes as hedge fund returns have cooled, as two high-profile hedge funds came close to failing and as concerns have mounted that more problems are around the corner.

"There's an inconsistency between the concept behind hedge funds, which is high-risk, high-return, and the concept behind pension funds, which is little risk, guaranteed return," said William F. Galvin, the Massachusetts secretary of state. "Unfortunately, what's happening is, increasingly, managers of pension funds -- most of whom have large debt or potential debt in the future -- see this [investing in hedge funds] as sort of a panacea for their growth needs. And it's not. It's a very dangerous approach."

Once reserved for the wealthy, hedge funds are lightly regulated investment vehicles that are handling an increasing amount of money for middle-class workers through pension funds as well as retail investors through funds of funds. By pooling money, funds of funds allow investors who do not have the minimum required investment -- often in the millions of dollars for hedge funds -- to gain access to the exclusive club.