No Hedge Fund

Pension-Gate: Some Good News from CalPERS

No Hedge Fund

According to this press release, the $300 billion California Public Employees’ Retirement System (CalPERS) will eliminate its hedge fund program which currently consists of $4 billion spread over 24 hedge funds and six hedge fund-of-funds. For the fiscal year ending 6/30/2014, CalPERS paid $135 million in fees (about 3.4%) and received a return of 7.1%. Over that same period, the S&P 500 Index gained 24.6%. CalPERS’ targeted rate of return is 7.5%, and for the ten years ending 6/30/2014, their hedge funds have delivered 4.8%, according to this article from Bloomberg. Over that same period, the S&P 500 Index had an annualized return of 7.8%. Although the press release claimed that the decision was not based on performance but rather on “complexity, cost, and the lack of ability to scale,” we believe that the numbers speak for themselves.

In the video that accompanies the Bloomberg article cited above, Erik Schatzker provides a wonderful analogy when he says, “CalPERS giving up hedge funds is like Harvard giving up football.” While football is in no way central to Harvard’s prestige, it would have huge symbolic importance if Harvard were indeed to give up football. Other schools would likely follow suit. Even though hedge funds only make up a little over 1% of CalPERS’ assets, many other public pension funds will now be forced to reconsider their hedge fund investments. We encourage the board members of the San Francisco Employees’ Retirement System [SFERS] to ditch their proposal to invest 15% of their $20 billion of assets into hedge funds for the first time. We hope they will follow the examples of CalPERS and the Los Angeles Fire and Police Employees’ Pension Fund which has decided to exit hedge funds altogether after an investment of $500 million produced a return of less than 2% over seven years, according to General Manager Ray Ciranna. While the hedge-fund investment was only 4% of the total portfolio, it accounted for 17% of all the portfolio’s expenses at $15 million per year. Mr. Schatzker also compares CalPERS to the outspoken child in the Hans Christian Andersen story “The Emporer’s New Clothes.” The Chief Investment Officer of CalPERS, Ted Eliopoulos, did not claim that the hedge fund managers were naked, but he came close enough when he said, “One of our fundamental investment principles is that cost matters; hedge funds are an expensive investment vehicle, especially at our scale.”

One final important reason for CalPERS’ decision given by Mr. Eliopoulos is that hedge funds are not an asset class, as they are so commonly and incorrectly assumed to be. We like to think of them as a compensation scheme masquerading as an asset class. Within CalPERS, their hedge fund program bore the name “absolute return strategies”. As we have noted on many occasions, while there may be many funds that claim to deliver absolute return, we have yet to see an investor who has actually received it

To review several articles on this topic, please see: 

Pension-Gate: A Review of the Florida Retirement System

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

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?