Role of Hedge Funds in Institutional Portfolios: Florida Retirement System

The Florida Retirement System (FRS), one of the largest state pensions in the U.S., is administered by the State Board of Administration (SBA). The SBA began investing in hedge funds in 2007 and, by 2015, it was permitted to allocate up to 20% of FRS's assets to hedge funds and other alternative investments. These investments aimed to enhance portfolio efficiency through diversification and opportunistic growth strategies. Despite this, hedge fund investments have been controversial due to concerns over their cost, complexity, and perceived lack of transparency, exemplified by the California Public Employees' Retirement System (CalPERS) withdrawing from hedge funds in 2014.

Following the 2008 financial crisis, FRS's funding status dropped from 107% to 87%, prompting scrutiny from lawmakers who viewed the system as underfunded and financially unsustainable. This situation led to debates on whether to close the defined-benefit plan and transition to defined-contribution plans for new employees. In the light of these debates concerning the viability of the retirement system, SBA's hedge fund program faced public challenges, including establishing a credible and effective investment strategy, managing risks, selecting appropriate funds, and demonstrating transparency and accountability to stakeholders. The program needed to balance generating sufficient returns with maintaining credibility and adherence to statutory guidelines.