STUMP » Articles » Public Pensions Watch: California pension fund pulling out of hedge funds » 16 September 2014, 09:46

Where Stu & MP spout off about everything.

Public Pensions Watch: California pension fund pulling out of hedge funds   


16 September 2014, 09:46

Well, I think the alternative assets in public pensions series is gone on so long, I need to make a new blog category.

But today I have some good news: the gigantic California public pension system Calpers has announced it’s pulling out of hedge funds:

The largest U.S. public pension plan is getting out of hedge funds as part of an effort to simplify its assets and reduce costs, a retreat that could prompt other cities and states to consider similar moves.

The California Public Employees’ Retirement System said Monday it would shed its entire $4 billion investment in hedge funds over the next year.


That’s quite the move. Let’s look at the reasons given:

“Hedge funds are certainly a viable strategy for some,” said Ted Eliopoulos, interim chief investment officer at Calpers, in a statement. For Calpers, the program “doesn’t merit a continued role” due to how complex and costly the funds can be, he said.

The dramatic exodus at Calpers follows a review of the hedge-fund portfolio that began in March, following the death of former chief investment officer Joseph Dear. Calpers officials began raising questions about whether hedge funds are too complicated or can effectively counterbalance poorly performing equities during a market crash, said people familiar with the situation. The fund hasn’t yet selected a permanent successor to Mr. Dear.

On Monday, Mr. Eliopoulos and his staff informed Calpers’s investment committee during a closed session that they made the decision to pull out from a total of 24 hedge funds and six “funds of funds” that invest in a collection of hedge funds. The funds that invest money for Calpers include Och-Ziff Capital Management Group, which had more than $700 million of the roughly $4 billion invested as of June 30, according to a Calpers document.

The second-largest U.S. public pension, the California State Teachers’ Retirement System, will be evaluating its hedge-fund investments at the end of this year following a three-year experiment in which it allocated $700 million to such strategies. It was the first foray into such investments, and in the last year its gain from hedge funds was 0.13%, lowest among all asset classes in the fund.

The return “is one of many factors” the fund’s investment committee will consider “as they weigh the appropriateness of hedge funds in the portfolio going forward,” said a spokesman for the teachers’ fund.

The bolded item reminds me of something I saw when I worked at TIAA-CREF, in 2006/2007. They had a Risk Management department that looked at the structured securities in the TIAA-CREF portfolio, and using their own, independent models (i.e., independent of the models the market had been using to price these things), they decided that the assets were not giving sufficient yield for the risks being borne by the company.

And so they got out of their positions….some months before that whole asset class melted down because there were a lot of hidden risks in those assets.

I hope smaller public pension funds rethink their foray into alternative assets — because if Calpers, the largest public pension fund in the U.S., has decided that these assets are too complicated for them…. guess what. They’re probably too complicated for most public pensions.

However, let us see how the quote from Calpers was given elsewhere:

“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost and the lack of ability to scale at CalPERS’ size, the ARS program doesn’t merit a continued role,” Mr. Eliopoulos added.

Okay, so smaller funds may claim that hedge funds may not scale to give extra return for super-huge plans like Calpers, but give them a boost. I suppose. There’s still the liquidity problem.

Here’s the NYT coverage:

A growing number of pension funds and institutional investors have expressed concern that the fees that hedge funds charge are too high. While there is a range, hedge funds typically follow a “2 and 20” model where investors pay management fees of 2 percent of the total assets under management and 20 percent of the profit.

These concerns have become more pronounced as performance across the hedge fund industry has disappointed investors. Hedge funds have underperformed the Standard & Poor’s 500-stock index for the last five years, a metric that pension funds frequently cite as a comparison. In 2013, for example, the average hedge fund returned just 9.1 percent, according to the data firm HFR. That compares with a 32.4 percent increase in the S.&P. 500.

Calpers said it paid $135 million in hedge fund fees over the financial year that ended on June 30. The hedge fund investments returned just 7.1 percent, adding 0.4 percent to the firm’s total returns. For its hedge fund investments to have a material impact, Calpers would have to increase its hedge fund investments to at least 10 percent of its total portfolio, which was not a feasible option, according to Joe DeAnda, a spokesman for Calpers.

And Bloomberg coverage:

While Calpers was one of the earliest pension funds to invest in hedge funds it has lagged behind many of its peers in increasing investments. The $60 billion Massachusetts fund has 9.5 percent of assets in hedge funds.

New Jersey’s state plan, with $81 billion in assets, has added more than $1 billion in new hedge-fund investments in fiscal year 2014.

Calpers’ former chief investment officer, Joe Dear, who died in February from prostate cancer, restructured the pension’s portfolio after he was hired in 2009 to steer the fund through the recession. He shed speculative real estate investments and focused on private equity, emerging markets, hedge funds and public-works projects to help meet the fund’s targets. Dear’s permanent replacement has yet to be named.

As per my TIAA-CREF story, they new guys have decided they’re not getting what they need from hedge funds on a net basis.

Oh, and an ending to my story: throughout 2008, the Risk Management department would not shut up about how much in losses they had saved TIAA-CREF from.

Which is nice.

The aftermath of these things tends to be people explaining why they couldn’t foresee the disaster. It’s nice when risk management does its job and can point to the disaster it helped you avoid. That doesn’t come along often enough.

Related Posts
Public Pension Returns Start to Roll In for FY 2022
Mornings with Meep: I'm Happy I Didn't Wait
Introducing this Week's State Pensions Example: Nevada