No Hedge Fund

Pension-Gate: The Repercussions of CalPERS' Hedge Fund Decision

No Hedge Fund

About a month ago, we published this article about the $300 billion California Public Employees’ Retirement System (CalPERS) deciding to terminate its $4 billion hedge fund program. Today, we were pleased to see this article in the Wall Street Journal indicating that other pension plans are strongly considering following suit. That is exactly what he hoped would happen.

One situation we have been watching closely is the San Francisco Employees’ Retirement System (SFERS) consideration of a motion to move 15% of their assets into hedge funds. In the wake of CalPERS’ decision, the chairman of SFERS’s board has put that vote on indefinite hold. As we pointed out in this article, the assumptions about the risks and returns of hedge funds used to justify the proposal were highly questionable and even Warren Buffett weighed in against it. If the Oracle of Omaha was not enough, then perhaps CalPERS was the tipping point.

In Austin, Texas, officers responsible for the city police pension plan are discussing the possibility of withdrawing all of their hedge fund investments. As CEO Sampson Jordan remarked, “CalPERS is like the godfather of retirement systems; it’s always alarming when the big guy makes a statement like that.” Should they decide to go through with this, they definitely have a viable alternative right in their own city—Dimensional Fund Advisors.

Lastly, the Auditor General of Pennsylvania asked the managers of the state pension fund to reconsider the $7.6 billion they currently have allocated to hedge funds. Like Austin, Pennsylvania also has an excellent alternative to hedge funds in their own backyard—Vanguard. In fact, there is already a precedent for one county in Pennsylvania dumping its actively managed funds in favor of Vanguard’s index funds, thanks largely to the persuasive power of John Bogle.

Given the glacially slow speed at which institutional funds move, we may only have seen the beginning of a large migration that will take several years to complete. For example, the County Employees Retirement Fund of Jefferson City, Missouri, now has 25% of its assets in hedge funds, but in the wake of CalPERS’ decision, the topic is now on the agenda for discussion at the next board meeting. This means it could take months or even years before an actual divestment occurs.

According to Hedge Fund Research, the hedge fund industry managed about $2.8 trillion as of 9/30/2014. Assuming they are collecting an average of 2% of assets and 20% of profits, there is an enormous amount of money at stake here. It should be no surprise that 31 members of the Forbes 400 derived their fortunes from managing hedge funds. We are reminded of Simon Lack’s challenge issued in his landmark book, The Hedge Fund Mirage, to find someone who became rich by investing in hedge funds rather than managing them. It has yet to be accepted.

We at Index Fund Advisors will continue to watch for new developments in this on-going story, and we promise to keep you apprised of what we learn.

To review several articles on this topic, please see: 

Pension-Gate: A Review of the Florida Retirement System

Pension-Gate: Some Good News from CalPERS

Pension-Gate Continues: Some Good Advice for the Hawkeye State

Pension-Gate - Good News from Pennsylvania

Pension-Gate Continues: North Carolina is on Notice

Pension-Gate: CalPERS Performance for the Fiscal Year Ending 6/30/2013

Pension-Gate Continues - Maryland has been Called Out

Pension-Gate: More Smart Advice from Maryland

Active vs. Passive — A Look at Pensions in the U.K.

A Summary of the 2005 SEC Study of Pension Consultants

Do Investment Consultants Add Value?