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Pensions Face Risks When Using Hedge Funds, GAO Report Says

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Hedge funds and private equity investments pose a number of risks and challenges beyond those posed by traditional investments, according to a Government Accountability Office report released Wednesday.

In its 17-page report, GAO found the share of large plans with hedge fund investments grew from 11 percent in 2001 to 60 percent in 2010.

Over the same time period, private equity investments grew from 71 percent of large plans in 2001 to 92 percent in 2010.

Investors in hedge funds or private equity may not know all the risks, GAO said. Risks include uncertainty of the precise value of their investment or owning thinly assets, making valuation difficult.

Such investments may include leveraged, or borrowed assets, which can magnify profits but can also magnify losses in the event of a market downturn.

GAO said previous reports in 2008 and 2010 showed the investments can offer plan sponsors advantages that may not be as readily available from more traditional investment options.

“Nonetheless, it is equally clear that investments in such assets place demands on plan sponsors that are significantly beyond the demands of more traditional asset classes,” the report said.

Click here to read the full report.

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