Merced County Employees cuts hedge fund target, ups fixed income - Pensions & Investments

Merced County Employees' Retirement Association, a $1.1 billion pension fund, is executing a material shift in its investment allocation strategy by cutting its hedge fund target allocation in half and substantially increasing its fixed income exposure. The fund is reducing its hedge fund target from 10% to 5% while simultaneously raising domestic fixed income allocations to 18% from 11%, according to investment consultant Meketa Investment Group, which advised on the strategic changes.

This rebalancing reflects a broader institutional reassessment of alternative investment exposure within the public pension universe. The move toward fixed income and away from hedge funds aligns with structural trends observed across the pension industry, where funds have increasingly questioned the risk-adjusted returns and fee structures associated with hedge fund strategies relative to more liquid, lower-cost alternatives. The timing of this decision in April 2024 positions the fund to benefit from an elevated fixed income environment, where yields have remained attractive following years of rate increases.

The changes to Merced County's portfolio represent deliberate risk management and a prioritization of benefit-payment obligations over performance chasing. By increasing the weight of fixed income—a more predictable asset class—the fund is likely addressing both liability-matching concerns and volatility reduction objectives, common priorities for pension funds managing defined benefit obligations to a growing retiree population. This tactical shift demonstrates how mid-sized pension funds are adapting their strategic asset allocation frameworks in response to current market conditions and evolving views on alternative investment viability within diversified portfolios.