University of California Defies Calpers on Hedge Funds

The University of California has increased its hedge-fund holdings by a factor of 10 since 2004, even as the California Public Employees’ Retirement System, the largest U.S. pension, said it’s pulling all $4 billion it had in such investments because they’re too complex and too expensive.

Hedge funds account for $5.6 billion of the university’s $90.7 billion portfolio, which consists mostly of a pension fund and endowments, according to university records. UC had less than $500 million in hedge-fund holdings a decade ago, the records show.

“Hedge funds are called alternative assets, but they’re definitely a mainstream asset now,” Amy Bensted, head of hedge fund products at London-based researcher Preqin Ltd., said by telephone. “Since Calpers’ decision, some pension funds are putting pressure on managers to cut fees, but they recognize that hedge funds are serving a valuable purpose. We expect the trend to continue.”

UC’s decision to increase its hedge-fund holdings as Calpers divests shows that the pension, though a major institutional investor, isn’t setting the tone for other institutions of the most populous state. The California State Teachers’ Retirement System also has signaled that it’s staying in the hedge fund business.

Beating Benchmark

Ted Eliopoulos, chief investment officer of $298 billion Calpers, said in September that the pension would eliminate its hedge-fund holdings and put the $4 billion into other investments. The Oakland-based university system doesn’t plan to follow Calpers’s lead, spokeswoman Dianne Klein said.

“The performance of UC’s absolute return program has met our objectives,” Dan Scannell, a university public-records coordinator, said in a statement. “The role of the absolute return strategy is to add diversification while lowering overall volatility to the entity returns.”

Hedge funds produced a 14.9 percent gain on investments for the university in the year ended June 30, beating the goal of 6.8 percent, according to records provided by Scannell. Over five years, the funds’ 8.5 percent return eclipsed the 2.1 percent benchmark, according to the records.

Hedge funds returned an average 8.6 percent in the year ended June 30, according to Wilshire Trust Universe Comparison Service data. Over five years, the average hedge-fund return was 4.84 percent, the Santa Monica, California-based investment advisory firm said in an e-mail.

Unknown Costs

The UC records don’t show the specific hedge funds in which the university has holdings, nor do they show the cost of administering the program. Klein said that information wasn’t available.

The investments -- $52 billion from the university retirement plan, $15 billion from a retirement savings plan and smaller amounts from endowments, short-term and total investment pools -- are overseen by Chief Investment Officer Jagdeep Singh Bachher, who reports to President Janet Napolitano and the university regents.

The $186 billion California State Teachers’ Retirement System, the second-largest pension, made its first hedge-fund investment this year and has no plans to change, Chief Investment Officer Christopher Ailman said in September.

More than 70 percent of U.S. public pension funds have increased their investments in hedge funds since 2011, according to data from Preqin.

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