Pension risk?

Why don't investors REDUCE their risk through strategy diversification and hedging? It is good to see that 23% of pension funds are doing their best to climb out of underfunded status by allocating to more sophisticated methods of investing money but the bigger worry is that 77% still don't! Absolute liabilities REQUIRE absolute returns.

Negative compounding and low interest rates devastate portfolios. That is why, despite recent strong markets, the markets of 2000/02 hurt investors so much. Sustainable long term performance means avoiding severe drawdowns; if the market drops 50% it must climb 100% to get back to even. A hedge fund that drops 50% is likely out of business - period. But long only funds carry on collecting their fees while having the temerity to urge clients to stay in for the "long haul"!

However you measure it, good hedge funds are safer than long only funds. Drawdowns, volatility, risk management, alpha generation, beta dependence...any measure. Sure there are crooks and incompetents as in any industry but that doesn't reduce the ESSENTIAL value of hedge funds to a portfolio. I am not saying that hedge funds are a total solution but they add a lot to the answer than holding only stocks and bonds.