CalPERS Kicks Hedge Funds To The Curb Sep 16 2014 | 5:51am ET Hedge funds have received a huge blow from the largest public pension plan in the U.S. The California Public Employees’ Retirement System has decided to eliminate its hedge fund program, known internally as the Absolute Return Strategies (ARS) program, as part of an ongoing effort to reduce complexity and costs in its investment program. The staff recommendation, supported by the investment committee, will exit 24 hedge funds and six hedge fund-of-funds valued at approximately $4 billion. “We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS interim chief investment officer. “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 at CalPERS’ size, the ARS program is no longer warranted.” Following the 2008 global financial crisis, CalPERS began examining ways to ensure it was less susceptible to future large drawdowns. The system restructured its investment operations, improved its internal oversight and control functions, and refocused some of its investment programs. In February 2014, the CalPERS Board adopted a new asset allocation mix that reduces risk to the portfolio, while still being able to achieve its return goal of 7.5%. CalPERS earned 18.4% during the 2013-14 fiscal year and has averaged a 12.5% return for the past five years and an 8.4% return for the past 20 years. In September 2013, the CalPERS Board adopted a set of Investment Beliefs to inform the strategic decision making of the System. Investment Belief 7 states that “CalPERS will take risk only where we have a strong belief we will be rewarded for it.” Investment Belief 8 notes that “Costs matter and need to be effectively managed.” CalPERS will spend approximately the next year strategically exiting current investments in a manner that best serves the interests of the portfolio. Existing ARS staff will be reassigned within the Investment Office. “The staff dedicated to our program have worked diligently and we will ensure that their talent can continue to help CalPERS meet its investment objectives,” said Eliopoulos. CalPERS has approximately $300 billion in assets.
I remember hearing from private investment counsel at a major bank in 2007 that they didn't advise using hedge funds although they would buy them for me if I signed a waiver. The reason given was that they aren't worth risk/reward as per their internal research. I think that this decision kind of confirms that hypothesis. I wrote elsewhere in response to a question about why there were not used much about their dismal returns (on average not every fund) after I did my own research of the truth or their comment. What is most curious to me is that, IMO, HFT was eating their lunch for years (retail was blown out early), yet they continued to party on like they were doing great. Lots of people still don't understand that HFT costs every trader - position down to daytrading. I pointed this out in my post about HFT being like strip-mining the sea. HFT killed the larger fish and now the HFT firms are suffering a lack of fish. Of course, in most cases hedge funds were mis-used by portfolio manager IMO. FWIW, I have seen much better returns lately for my own very tiny trading so perhaps for "BTFDers" this report is buy signal for the long drought of hedge funds? CalPERs has a much much bigger problem coming up and that is the one I am currently focusing all my forward research on. Also, look for a jump in GDP numbers just before the midterm elections. I wondered why US GDP was rewritten last fall and revised downwards for decades. My guess - it is the same strategy as the presidential elections - the economy was just starting to turn around and the unemployment number dropped dramatically (to everyone's surprise, except me) at the last reporting before Nov 2012 since reportedly no president had ever been elected with unemployment above a certain number. The market loved it. Hopefully they will love their big upward GDP number if that shows up. What is the old saying - fool me once, shame on you, fool me twice .... open a hedge fund and really make some serious coin!
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% Good points Star D + Dealmaker; CalPERS cited both cost + complexity.Too bad many of the good+ best funds are closed for new business. a] Also too bad the former CalPERS CEO pleaded guilty to fraud[source= FOX business news] c]Long term, probaly NO hedge fund could overcome CA excessive taxes/excessive regulation. z]Sounds like the cost was a much greater factor than complexity;when one has trouble[years of trouble]beating S+P500, then chargers 2/20%,LOL
The hedge fund industry is full of halves and halve nots. There are a few great managers out there, but as another poster mentioned, they are all mostly closed to new investors. So you are stuck paying 2/20 for a run of the mill fund who probably will underperform the S&P. Calpers is too big to make investing in hedge funds worth it for them as they most likely had trouble finding enough viable funds open to deploy all of their capital.
%%%%%%%%%%%%%%%%%% Interesting timing CalPERS is getting out of hedge funds when the bull market is real extended.LOL It may get more extended, especially in 4th quarter.Yes, a whale always attracts attention, [+ group of whales] even more so.To paraphrase IBD, an elephant always is obvious in a bathtub, whale even more so, so to speak.
Oh gee .... GDP numbers revised upwards - who could have known that would happen? Interesting speculation in articles. Would Calpers get advance warning of hedge fund issues (pun not intended)? Or would they just worry about rising interest rates and the end of QE? Where can I get tomorrows paper today? http://www.thefiscaltimes.com/Articles/2014/01/22/Pimco-Loses-Mohammed-El-Erian-Its-Heir-Apparent http://online.wsj.com/articles/sec-to-pay-30-million-whistleblower-award-its-largest-yet-1411406612 http://www.zerohedge.com/news/2014-09-26/bill-gross-quits-pimco-which-he-co-founded-joining-janus http://www.forbes.com/sites/timmaurer/2014/09/25/the-real-danger-in-overstating-returns-like-pimco/
%%%%%%%%%%%%%%%% ''CALpers get advance warning?? ''Its possible but in their case looks more like they like to pay peanuts + get monkeys.I don't know if they fit in the 78% o f state plans underfunded.Payed peanuts/plus for 10 years + got monkeys.Not a prediction.