Calpers to Exit Hedge Funds, Divest $4 Billion Stake

Retirement
Calpers has more than 1.6 million members in its retirement system and more than 1.3 million in its health plans. Source: Getty Images

The California Public Employees’ Retirement System plans to divest the entire $4 billion that it has with hedge funds, saying they’re too expensive and complex.

The decision to eliminate 24 hedge funds and six hedge fund-of-funds, isn’t related to the performance of the program, said Ted Eliopoulos, the interim chief investment officer. The board of the $298 billion pension, known as Calpers, hasn’t decided where to invest the money after the pullout, which will take about a year, he said.

“We concluded that we would eliminate the hedge fund program in order to reduce the complexity, reduce the costs in the program, particularly in relation to our view that given the scale of Calpers, we would not be able to scale a hedge fund program to a size that would really move the needle,” Eliopoulos said today in an interview.

The largest U.S. pension is getting out of hedge funds even as other large public plans such as New Jersey’s add to the private portfolios. Calpers has been working to reduce risk after the global financial crisis wiped out more than a third of its wealth, forcing it to increase contributions from taxpayers to cover losses. Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.

Fund Fees

The pension fund paid $135 million in fees in the fiscal year that ended June 30 for hedge fund investments that earned 7.1 percent, contributing 0.4 percent to its total return, according to Calpers figures.

Calpers earned 18.4 percent in the fiscal year as global stock indexes rose to records. The fund’s market value reached $300 billion for the first time July 3, making it bigger than all but two companies on the Dow Jones Industrial Average.

The pension invests in funds run by Och-Ziff Capital Management Group LLC, Bain Capital LLC’s Brookside Capital, Lansdowne Partners LP and Canyon Partners LLC, according to a report from Calpers. Its fund-of-funds investments include funds run by Rock Creek Group LLC and Pacific Alternative Asset Management Co.

Calpers’ return goal is 7.5 percent. The annualized rate of return on its hedge fund investments over the last 10 years is 4.8 percent.

Alternative Investments

Hedge funds have amassed a record $2.8 trillion in assets as institutional investors pour money into alternative investments. McKinsey & Co. said last month that assets in alternatives, which also include real estate and private equity, may reach $14.7 trillion by 2020, double the current level.

Unlike traditional money managers, hedge funds can bet on rising as well as falling prices of securities, aiming to make money in any market environment. They generally charge fees of 2 percent of assets and 20 percent of returns, a level of remuneration that some institutions have balked at.

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.

Calpers has more than 1.6 million members in its retirement system and more than 1.3 million in its health plans. The fund administers health and retirement benefits for 3,090 public school, local agency and state employers.

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