Hedge Funds May See Up to $8.7 Billion Windfall From Calstrs

  • Allocation is part of defensive strategy, CIO Ailman says
  • Returns have ranged from 23% gain to 25% loss in past decade

The California State Teachers’ Retirement System plans to add to its holdings of hedge funds as it seeks to smooth volatile returns, a move that may send as much as $8.7 billion to hedge funds over the next three years.

Calstrs will allocate the money to global macro strategies and trend-following commodity trading advisers as part of a new asset class called ‘Risk Mitigating Strategies,’ which is targeted to be 9 percent of its portfolio, Chief Investment Officer Christopher Ailman said in an interview in Singapore Friday.

Christopher Ailman

Photographer: Chris Goodney/Bloomberg

The West Sacramento-based fund is seeking ways to hedge against volatile stocks that compose more than half its $193.4 billion portfolio, causing returns over the past decade to swing from a 23 percent gain in 2011 to a 25 percent loss in 2009.

“We have a very large bias to growth in GDP in our portfolio,” Ailman said. “We want to hedge that. We actually want the hedge-fund strategies not for extra return. We are doing the opposite. We think that they actually can be a defensive strategy.”

The move bucks a trend away from hedge funds, which have suffered their biggest investor redemptions this year since the aftermath of the global financial crisis, amid criticism of lackluster returns and high fees. The New Jersey Investment Council last month voted to cut its target allocation to hedge fund managers by 52 percent, and New York City’s pension for civil employees in April decided to exit its $1.5 billion portfolio of hedge funds.

China Investment Corp., the nation’s $814 billion sovereign wealth fund, said last week that it had recently trimmed its investments in discretionary macro hedge funds after poor performance.

“We think discretionary macro managers are quite challenged in the near future,” said Roslyn Zhang, managing director of fixed income and absolute-return investments at CIC.

Hedge funds have gained 2.6 percent this year through the end of August after returning 1.6 percent in 2015 -- the worst performance since 2011, according to data provider Eurekahedge Pte.

Redemptions are mounting at hedge funds as investors push back against poor performance amid volatile markets. They pulled an estimated $25.2 billion from hedge funds globally in July, the most since February 2009, according to data from eVestment. Asian hedge funds have also struggled, with investors withdrawing a net $7 billion this year through the end of July, the data show, bringing total assets in the region to $55.3 billion.

Lagging Returns

Calstrs, which targets returns of 7.5 percent on average over time, earned 1.4 percent in the 12 months through June.

The Risk Mitigating Strategies hold U.S. Treasuries as well as trend-following and global macro hedge funds. Within that category, 50 percent to 55 percent will be allocated to hedge funds, Ailman said. That would mean Calstrs’ allocation to hedge funds will increase to as much as 5 percent of total assets, up from about 0.5 percent currently.

Based on the Calstrs assets as of July of $193.4 billion, that would amount to an allocation of as much as $8.7 billion to hedge funds. The target will be reached “probably within three years,” Ailman said.

Asset Allocation

The fund had 56 percent of its assets in global stocks, 16 percent in fixed-income, 13 percent in real estate and 8 percent in private equity as of July 31, according to its website. The balance was in cash and other financial instruments, including the Risk Mitigating Strategies, which held 0.9 percent.

Calstrs considers hedge funds as a strategy rather than an asset class, Ailman said.

“When you look at Yale, Harvard or some of the sovereign wealth funds, they consider hedge funds an asset class and they are looking for extreme out-performance,” he said. “We say a hedge fund is just a business model, just like a partnership structure is just a business model.”

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