The California Public Employees’ Retirement System (Calpers), one of the largest pension funds in the United States, has decided to drop its investment in hedge funds by 40% (or down to $US3 billion) this year, says the WSJ.
The “why?” here is pretty simple — these pension funds think hedge fund fees are too expensive.
And it isn’t just Calpers. The School Employees Retirement System of Ohio decided to lower its hedge fund investment from 15% to 10% in 2015; New Jersey’s State Investment Council lowered its investment from 12.25% to 12%; and San Francisco Employees’ Retirement System is debating a cut as well.
For now it’s just trickle compared to hedge fund inflows, but these allocation decisions matter — especially from pensions like Calpers, which is a leader in the industry because of its sheer size.
A Calpers spokesperson said the pension fund was taking a more “back to basics” approach to its investments.
Here’s what that means — until 2004 pensions were mostly involved in plain vanilla investments. Hungry for returns, however, they were willing to take on the higher fees in the hedge fund world.
Now those fees are proving to be too much for too little.
With many hedge funds…outperformance hasn’t materialised in recent years: Average public-pension gains from hedge funds were 3.6% for the three years ended March 31 as compared with a 10.9% return from private-equity investments, a 10.6% return from stocks and 5.7% from fixed-income investments, according to a Wilshire review of public pensions with more than $US1 billion in assets.
It worth noting that allocations to private equity are still climbing.