Pensions Look to Leverage Up

[omagh]

The weak speculators in the market just can't help themselves from self-inflicted errors.  When one starts, others will follow.  I'm increasingly following the Buffett, Klarman and Berkowitz views for having significant cash holdings in one's portfolio.

 

http://online.wsj.com/article/SB20001424052748704905604575027601300360196.html

 

Pensions Look to Leverage Up

State of Wisconsin Investment Board Clears Plan to Borrow to Juice Returns

Public pension funds needing to boost their returns but frustrated with hedge funds and private-equity investments are turning to one of the oldest investment strategies—using borrowed money to boost performance.

 

The strategy calls for leveraging pension funds' safest asset—government or other high-grade bonds—while reducing exposure to stocks.

 

The State of Wisconsin Investment Board, which manages $78 billion, became among the first to adopt the strategy when it approved the plan Tuesday. The fund will borrow an amount equivalent to 4% of assets this year, and as much as 20% of its assets over the next three years.

 

Fund officials say that use of leverage could eventually go higher—in theory, at least, up to 100% of assets, according to the staff analysis.

 

 

...more at www.wsj.com...

[cayale]

Yeah, this is unbelievable.  All so they can purportedly achieve their 8% return assumptions despite a big fixed income allocation.

 

This will not end well.  It will come out of taxpayers pockets.

 

Have you seen the price of corporates and government bonds lately?  It is hard to get up the stomach to purchase one, let alone with borrowed money.  If they hurry, they can buy before the Fed exits the market. 

[lessthaniv]

GULP. :'(

[beerbaron]

There is probably no difference in the borrowed money. The hedge funds were probably using high leverage as well it just did no show on their balance sheet.

 

Anyhow, I don't understand why any pension fund would borrow money. They should be aiming at average results with the least friction costs possible.

 

BeerBaron