Calpers — the California Public Employees’ Retirement System — has announced that it will completely divest itself from hedge funds, taking $US4 billion out of the game, says Bloomberg.
Interim Chief Investment Officer Ted Eliopoulossaid that the problem is not that the 24 hedge funds and 6 fund of funds Calpers was invested in did/do not perform well. The problem is that they are simply too expensive and complex.
Calpers paid $US135 million in fees to hedge funds during the last fiscal year. Hedge fund investments earned the pension 7.1% during that time period (overall the pension returned over 18%).
As the fifth largest pension fund in the world, and the largest in the United States with about $US300 billion in assets. It wouldn’t be out of this world to think other pension funds and institutional investors may follow in Calpers’ footsteps.
It shrank its hedge fund investments by 40% earlier this year citing the same concerns. At that point, a Calpers representative said that the fund was going to start taking a more “back to basics” approach to investing.
That means Wall Street firms like Och-Ziff Capital Management, Bain Capital, Rock Creek Group LLC and Pacific Alternative Asset Management Co. will see some money fly out the door.
Check out Calpers’ full press release below:
CalPERS Eliminates Hedge Fund Program in Effort to Reduce Complexity and Costs in Investment Portfolio
Decision not based on performance of program
SACRAMENTO, CA — The California Public Employees’ Retirement System (CalPERS) today announced that it will eliminate its hedge fund program, known internally as the Absolute Return Strategies (ARS) program, as part of an ongoing effort to reduce complexity and costs in its investment program.
The staff recommendation, supported by the Investment Committee, will exit 24 hedge funds and six hedge fund-of-funds valued at approximately $US4 billion.
“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “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.”
Following the 2008 global financial crisis, CalPERS began examining ways to ensure it was less susceptible to future large drawdowns. The System restructured its investment operations, improved its internal oversight and control functions, and refocused some of its investment programs. In February 2014, the CalPERS Board adopted a new asset allocation mix that reduces risk to the portfolio, while still being able to achieve its return goal of 7.5 per cent. CalPERS earned 18.4 per cent during the 2013-14 Fiscal Year and has averaged a 12.5 per cent return for the past five years and an 8.4 per cent return for the past 20 years.
In September 2013, the CalPERS Board adopted a set of Investment Beliefs to inform the strategic decision making of the System. Investment Belief 7 states that “CalPERS will take risk only where we have a strong belief we will be rewarded for it.” Investment Belief 8 notes that “Costs matter and need to be effectively managed.”
“The Investment Beliefs exist to provide a compass for the System’s work to achieve its strategic goals,” said Henry Jones, CalPERS Board Member and Chair of the Investment Committee. “While certainly a complex issue, when applied to this decision, the Beliefs have served their purpose.”
CalPERS will spend approximately the next year strategically exiting current investments in a manner that best serves the interests of the portfolio. Existing ARS staff will be reassigned within the Investment Office.
“The staff dedicated to our program have worked diligently and we will ensure that their talent can continue to help CalPERS meet its investment objectives,” said Eliopolous.
CalPERS is the largest public pension fund in the U.S., with approximately $US300 billion in assets. CalPERS administers health and retirement benefits on behalf of 3,090 public school, local agency, and state employers. There are more than 1.6 million members in the CalPERS retirement system and more than 1.3 million in its health plans. For more information about CalPERS, visit www.CalPERS.ca.gov.