California Pensions to Dump $4-Billion Hedge Fund Investments

Thursday, September 25, 2014

In 2002, the California Public Employees’ Retirement System (CalPERS) was one of the first big public pension funds to invest in hedge funds―volatile, sophisticated, leveraged investments that generally aren’t available to the small private investor.

Last week, CalPERS became one of the first to announce it was divesting itself of the controversial financial vehicles. The pension fund emphasized the move was made because of high hedge fund fees, not the crummy returns. But it also could have had as much to do with optics.

Hedge fund managers got as much grief as bankers after the stock market crash in 2008-2009. But they didn’t get bailouts, like the bankers, and subsequently maintained a higher profile of arrogance coupled with less transparency about their business.

However, as Miles Johnson at Financial Times points out, a business that once catered mostly to wealthy private individuals and corporations now gets most of its investments from pension funds. So blowing off public sentiment is a bit harder these days. 

CalPERS announced that it would divest its investment portfolio of all hedge funds, a total of 24 plus six “funds of funds.” The total comes to about $4 billion out of CalPERS’ total assets of $300 billion. The amount may not be that significant compared to the overall investing CalPERS does, but the pension fund’s sheer size makes any decision noticeable among investors.

Hedge funds are comparatively expensive investment vehicles; they generally charge 2% of the assets they manage and 20% of any profits, according to The New York Times. The comparable costs for funds of funds are 3% and 30%. In addition, the recent run-up in the Dow has made hedge funds into poorer performers relative to the rest of the market.

One could ask why CalPERS waited so long. The pension fund received a 7.1% return on its hedge fund portfolio last year, compared with 18.4% overall last year. Hedge funds have also been an underachiever for them historically. They yielded a 4.8% annual return for the past 10 years, missing their target by two percentage points.

Saying “CalPERS is teeing it up for everybody,” Frederick E. Rowe Jr., vice chairman of the Employees Retirement System of Texas and general partner at Greenbrier Partners, told The Times: “This is a really critical period in the investment world where pension funds have a chance to demonstrate a little responsibility.”

That probably won’t happen, according to Lawrence Delevingne at CNBC.

He talked to hedge fund managers this week at Alpha Hedge West, an industry conference in San Francisco, and wasn’t hearing any talk of other pension funds following CalPERS’ lead.

“I seriously doubt that it is the beginning of a broader or enduring pullout,” John Rohal, executive chairman of Man's North American unit, told him. And Philip Larrieu at California’s other giant pension fund gave no indication his California State Teachers' Retirement System (CalSTRS) was ditching hedge funds.

“People are sticking to their plans,” said Arn Andrews, chief investment officer for the San Jose Department of Retirement Services.

–Noel Brinkerhoff, Steve Straehley and Ken Broder


To Learn More:

Slamming a Door on Hedge Funds (by Gretchen Morgenson, New York Times)

Rockefellers, Heirs to an Oil Fortune, Will Divest Charity of Fossil Fuels (by John Schwartz, New York Times)

Hedge Funds Are for Suckers (by Sheelah Kolhatkar, Bloomberg BusinessWeek)

Calpers’ Exit Has Sent Hedge Fund Managers a Public Health Warning (by Miles Johnson, Financial Times)

Why CalPERS Is Exiting the Hedge Fund Space (by Jon Hartley, Forbes)

Pensions Stick with Hedge Funds Despite CalPERS Exodus (by Lawrence Delevingne, CNBC)

Vulture” Capitalists Strike Vulnerable Cities and Counties (by Matt Bewig, AllGov)

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