Michael Marois
Sacramento
The California Public Employees’ Retirement System (Calpers) plans to divest the $4 billion (R44bn) that it invested with hedge funds, saying they are too expensive and complex.
The decision to eliminate 24 hedge funds and six hedge fund-of-funds, was not related to the performance of the programme, interim chief investment officer Ted Eliopoulos said on Monday. The board of the $298bn pension fund had not decided where to invest the money after the pull-out, which would take about a year, he said.
“We concluded that we would eliminate the hedge fund programme in order to reduce the complexity, reduce the costs… particularly in relation to our view that given the scale of Calpers, we would not be able to scale a hedge fund programme to a size that would really move the needle,” Eliopoulos said.
The largest US retirement fund 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.
Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.
The pension fund paid $135 million in fees in the fiscal year to June for hedge fund investments that earned 7.1 percent, contributing 0.4 percentage points to its total return, according to Calpers figures.
“One of our fundamental investment principles is that cost matters,” Eliopoulos said. “It is an expensive investment vehicle, especially at our scale.”
Because of its size, Calpers was often a trend setter among pension funds on investment strategies, Keith Brainard, the research director of the National Association of State Retirement Administrators, said.
“Their decision to divest from hedge funds will cause some public pension funds to re-evaluate their hedge fund strategy, although many public pension funds consider hedge funds to be a vital part of their diversified portfolios,” he said.
Calpers earned 18.4 percent in the fiscal year as global stock indices rose to records. The fund’s market value reached $300bn for the first time on July 3, making it bigger than all but two companies on the Dow Jones industrial average.
The pension plan invests in funds run by Och-Ziff Capital Management Group, Bain Capital’s Brookside Capital and Lansdowne Partners, according to a report from Calpers. Its fund-of-funds investments include funds run by Rock Creek Group and Pacific Alternative Asset Management.
Spokesmen for the funds either declined to comment or did not immediately respond to a request for comment.
Calpers’s goal for returns is 7.5 percent. The annualised rate of return on its hedge fund investments over the past 10 years is 4.8 percent. – Bloomberg