CalPERS, citing cost, to dump $4 bln of hedge funds

  • Funds are called too costly and complicated
  • Late CIO Dear embraced riskier asset classes
  • Hedge fund returns this year lagging S&P 500

The $300 billion fund, known as CalPERS, invests with firms including Och-Ziff Capital Management, Deepak Narula’s Metacapital Management and Bain Capital’s Brookside Capital and plans to pull the money out over the next year, sister news service Reuters reported. The fund also will exit funds of funds Pacific Alternative Asset Management Co and Rock Creek Group, among others.

Representatives for several of the affected funds did not immediately respond to requests for comment.

CalPERS has been investing in hedge funds for more than a decade, having been one of the first big-name retirement funds to put money into the loosely regulated hedge fund industry in 2002. Due to its size, its investment decisions have long been followed closely and some industry experts said that other pension funds now might rethink some of their allocations to the roughly $3 trillion hedge fund industry.

“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost and the lack of ability to scale…the ARS program doesn’t merit a continued role,” Ted Eliopoulos, CalPERS’s interim chief investment officer, said in a statement, referring to absolute return strategies.

CalPERS said it will spend the next year pulling money out of 30 firms “in a manner that best serves the interests of the portfolio,” he added. Hedge funds often lock up their investors’ money for months, if not years.

Discussions about hedge funds’ role in the massive portfolio began after Joseph Dear, CalPERS’s former chief investment officer, died of cancer in February, people familiar with the fund said.

Dear, who joined CalPERS in 2009, embraced riskier assets including hedge funds and private equity funds, to help recover losses suffered during the financial crisis when its investments lost 23.6 percent during the fiscal year that ended on June 30, 2009.

But in recent years, most hedge funds have not delivered the outsized returns the industry became famous for, prompting many pension funds and other large institutional investors to question hedge funds’ fees, which often include a 2 percent management fee and 20 percent of the gains achieved. Hedge funds returned 4.10 percent this year through August, according to Hedge Fund Research, lagging the Standard & Poor’s 500 9.87 percent gain.

“The hedge funds haven’t contributed much to CalPERS’s results during the stock market boom, but the right ones could provide a hedge against a drop in the market,” said Erik Gordon, who watches the industry closely as professor of law and business at the University of Michigan.

In July, CalPERS said that its investments returned 18.4 percent during the fiscal year that ended on June 30 with hedge funds gaining 7.1 percent. Private equity investments returned 20 percent. The fund’s investment goal is 7.5 percent. For the 10-year period ended on June 30, CalPERS’s investments earned a 7.2 percent return.

CalPERS offers benefits to roughly 1.6 million current and retired police officers, fire fighters and other public employees.

Roughly half of all U.S. pension funds have made some allocation to hedge funds. According to industry trackers, some funds are looking for ways to cut costs. Massachusetts, which invests roughly $5.6 billion with hedge funds, is pushing to move some of that money into separately managed accounts and may even invest, at a lower cost, in strategies designed to mimic hedge fund returns.

The fund’s alternative asset program has had its ups and downs in recent years. Former CalPERS Chief Executive Officer Fred Buenrostro pleaded guilty earlier this year to bribery and fraud in a federal conspiracy case.

Svea Herbst-Bayliss is a correspondent for Reuters in Boston; Barani Krishnan, in New York.