CALPERS

California Public Employees' Retirement System

Pensions stick with hedge funds despite CalPERS exodus

A high-profile hedge fund exodus from a huge pension manager does not appear likely to spark a major movement.

Pensions, investment consultants and other money managers at an industry conference this week dismissed the idea that the California Public Employees' Retirement System's decision to cut a $4 billion slate of hedge funds would stall the otherwise steady increase of public retirement plans into so-called alternative assets.

"I haven't heard any rumblings about other pensions pulling out of hedge funds," Arn Andrews, chief investment officer for the city of San Jose Department of Retirement Services, said Monday on the sidelines of the Alpha Hedge West conference in San Francisco. "You either have a strategy or you don't—people are sticking to their plans."

CalPERS exit from hedge funds: Taste of things to come or one-off event?

Let’s take a look at the reasons that CalPERS cited for their divestment:

1.  Fees: At roughly $300B, the largest US pension can surely flex some muscle when it comes to reducing fees.  Many managers would buckle under a proposal such as: Would you like a check for $250M, please give us significant fee breaks. However, if you never negotiate fees, you are going to be paying 2 and 20 for the most part and that really hurts long term returns.

2.  Capacity/Scale: Even if CalPERS decided to allocate 10% (not just 1.4%) of their assets to hedge funds  they would not be the largest HF allocator; others have deployed humongous sums spreading capital among multiple large managers. Some have managed to deploy these sums while never representing more than a third of their managers’ assets. At the same time, when deploying large sums such as these you are constrained to a few dozen large managers and thus are not participating in the larger pool of managers.

3.  Complexity: Again, given their size and resources surely there are seasoned professionals (to bring in house) and droves of consultants that can help demystify hedge funds for the board of the pension. But to their point, the data on hedge funds is not readily available and easily normalized and can thus be difficult to analyze. This leads to challenges in evaluating managers for their actual skills, not just for pensions but everyone else.

BREAKINGVIEWS

Calpers may be trendsetter as it shows door to hedgies

Call it the Sacramento Model. In contrast to the famed Yale Model for endowments, Calpers, the $300-billion (U.S.) Californian pension manager, is exiting its $4-billion of hedge fund investments. For retirement funds, Calpers’ hedge-fund free regime could be more than the latest fad from the Golden State.




HEDGE FUND MANAGERS REACT: 

CalPERS Was Just Terrible At Picking Hedge Funds

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In this BLOG we will look at pensions and their impact on what are called Public Private Partnerships or P3’s.  IT will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies.