CalPERS, the nation's largest public pension plan, has recently decided to pull out their entire $4 billion investment from the hedge fund space. Their complaints appear to be focused on the fee structure and they do not appear to be alone, as reported by DealBook:
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.
While $4 billion isn't a lot of money when compared to the total amount of money under management by hedge funds, if the other major public pensions follow suit, it could be a problem for some funds:
On average, hedge funds still make up a relatively small portion of large public pension plan’s investments — about 1.3 percent as of June 30, according to the Wilshire Trust Universe Comparison Service. That share is up from about 1 percent in 2007, but stocks and bonds still make up most of pension investments.
What the article leaves out is that the total holdings of the largest 100 pension systems is bigger than the entire hedge fund industry which was noted to have grown to $2.8 trillion.
What do you think? Is this going to affect the hedge fund space in a meaningful way? How will it affect hiring/firing?
From the article, it seems as though a large part of the problem is the sheer scale that CalPERs has and the difficultly in deploying a material amount into HFs. It doesn't appear to be an indictment on the HF industry.
I was actually kinda surprised that they only had 4 b's in HFs. Just over 1% of AUM. Isn't the Harvard endowment something like 10-20% HFs? Good on CalPERs for seeing the light...
Actually, over the long term the HF asset class has a higher Sharpe ratio, lower volatility, and lower correlations than the S&P500. Me thinks that means its technically safer.
Would love to see the data you're citing. Not being antagonistic, just curious- I've read a number of different articles/journal publications that all seem to come away with different view and I'm trying to understand the discrepancies
Sure some have higher Sharpe ratios but usually that's accomplished by flexing down beta (eg long-short strategies). The real question should be 'is that worth 2 and 20?' For a large pension fund or endowment they effectively have an infinite time horizon, so really they should not be shying away from risk. Being long risk and keeping fees down is how they'll maximize their returns. Steering clear of HFs that charge 2-4x a good mutual fund rake, or 10x a passive strategy fee seems like the right way to go.
Of course hedge funds underperform the market in boom times. Calpers is acting just like a retail investor, buying high and selling low.
I'm not in HF but I dealt with calpers extensively, albeit it a while ago (15-20 years ago when I worked in repe and they invested in both our commingled funds and we managed some separate accts for them). My view on them even with 0-4 years experience in any business was that they were not the brightest bulbs. I'm not commenting on HF performance v fees or anything but they were basically glorified public servants. Most public pensions basically are but because they were and are the 800 LB gorillas of that world they took being dim witted and added espresso, steroids and meth to it.
HFs are added to these large portfolios for diversification with most having expected returns lower than the market as they are marketed as having lower betas and less correlation to equities (some at least). Telling us they had 9% returns vs the markets 32% doesn't mean anything. That's like selling all your bonds because they under performed equities. But I do understand the gripes, many don't perform as they are supposed to with high fees and low liquidity. Lots of funds are 1 and 10 not 2 and 20, so articles often try to spin it like all hfs are 2 and 20. I think once you factor in the lock up periods on top of the fees...they start looking not so hot. But it really depends. Definitely not completely ridiculous pulling out of hfs. Calpers is a government entity, hfs have a lot of scrutiny, there are liability issues. When you factor it all in, it's probably just easier for them not to have hfs in their portfolio.
There is a certain irony in doing the right thing at the wrong time and getting hammered for both. The lesson is, four billion buys a lot of soap to pick up in the shower.
Clearly they need less alpha and more beta.
Which reminds me, I think its time to liquidate my equity portfolio. Remember what happened last time they tried to invest on their own? One word: Stuy-town.
They have a good track record of allocating capital right before things implode: http://calpensions.com/2010/04/30/how-calpers-bet-big-on-real-estate-an…
Old-ish topic, I know...but just came across this today:
Alaska Retirement Management Board should consider increasing its absolute return investments as a result of Calpers’ decision to exiting its hedge fund investments, according to minutes from the pension’s September meeting, which cited comments by Jerrold Mitchell, a member of its investment advisory council. “Dr. Mitchell believes Calpers is close to being a perfect contrary indicator, meaning as long as decisions are opposite Calpers decisions, all will be just fine,” the minutes state. http://bit.ly/1yRL2fa (see page 43)
He's my hero
Largest U.S. public pension plan Calpers to Exit Hedge Funds (Originally Posted: 09/16/2014)
http://online.wsj.com/articles/calpers-to-exit-hedge-funds-1410821083
"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.
Do you think it is an overkill or hurt the HF industry? As far as I know, majority of hedge fund clients are those pension funds/endowment funds instead of high net worth individual since last decade
I wouldn't read too much into this. Calpers had $4bn in hedge funds. Total hedge fund assets are something like $2.3 trillion. It is less than 20bps of the total space. Everybody focuses on Calpers because they are the biggest state pension system but if you look at their performance it is nothing to write home about.
I'm not too worried about this 4bn loss. But since it is considered as leader in pension fund community, other pension funds may follow Calpers (either by pressure or by analysis)
It is kind of ironic to me that one of the largest LPs in the PE pond thinks that HFs are too expensive and too complicated. Matt Levine at Bloomberg had a great piece on this topic.
Veniam alias similique optio ut veniam. Ducimus voluptatem non magni placeat.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...