Does Anyone Else See the Disconnect Here ?

WSJ December 26 On Pension Funds Sticking With Their Hedge Fund Investments:

DECEMBER 26, 2008 Public Pension Funds Don't Flee
Some Say They'll Keep Hedge Investments Despite the Madoff ScandalArticle


By DAN MOLINSKI
Hedge funds have suffered through their worst year in more than a decade, punctuated by the Bernard Madoff scandal. But some public pension funds aren't writing them off, at least not yet.
Chief investment officers for pension funds note that despite some worrisome drawbacks, hedge funds continue to outperform stocks, and by a good margin. Hedge funds are down less than 18% this year, while the Standard & Poor's 500 index has dropped close to 41%.
Still in Hedge Funds
The News: Even after the Madoff scandal, some public pension funds are sticking with investments in hedge funds.Reasoning: The pension managers say hedge funds outperform stocks, so they need to invest in them.Caution: Most everyone agrees not to expect the level of returns of the glory days.Moreover, these funds have a mandate to make a healthy return, leaving them little choice but to keep a portion of their portfolio, often between 3% and 10%, in hedge funds because they offer the potential for large gains, even if the returns are currently negative.
Where Else to Turn?
"We have an 8.5% actuarial assumption, and ... we have to look for programs that can reach that level," said Alan Van Noord, chief investment officer at the $54.7 billion Pennsylvania Public School Employees' Retirement System. "There are very few asset classes that you can get [returns] above 8%."That pension funds remain committed to hedge funds may be a surprise given the industry's recent problems, where total assets have shrunk to about $1.5 trillion from nearly $2 trillion in June.
As stock markets crashed late in the summer, many investors in hedge funds sought to remedy liquidity problems by cashing out. That forced many hedge funds to tell investors they couldn't redeem their funds completely.

Pension managers were startled by the case against Bernard Madoff, shown leaving court on Dec. 17, but many will stick with hedge funds.
Despite many redemption requests being blocked, hedge-fund investors still cashed out more than $100 billion from September through November, the most ever in a three-month period. Some analysts say a smaller hedge-fund industry will be less able to generate huge returns.
Even some pension funds that cashed out of hedge funds recently are now returning. A few months ago, the $8.5 billion School Employees Retirement System of Ohio, or SERS, shelved its investments in hedge funds. Last week, the pension fund's board approved moving

WSJ December 26 On Corporate Bond Yields:

'Rebalance' Time? No, Says Bond Side
Corporate Debt May Still Beat Stocks

By SAM MAMUDI
Falling stock prices this year have left many investors' portfolio balances out of whack. But some managers argue against the need to rebalance holdings.
Mark Kiesel, executive vice president at bond-fund giant Pimco, a unit of Allianz SE, says the relative values of high-grade corporate debt compared with stocks means that selling bonds and buying stocks would be a mistake.
"We're in a unique situation where you can get 8% to 10% returns in high-quality corporate bonds, while stock returns are unlikely to do that for the next couple of years," Mr. Kiesel says. "If I asked you, 'Do you want 8% to 10% or 5% [from stocks], with three times the volatility,' which would you want?"