Hedge Funds No More for PERSCategories: California Developments
Public Retirement Journal by Amy Brown, October 15, 2014
In September, PERS announced plans to gradually sell off $4 billion in hedge fund investments over the next 12 months. As part of a continuing process of simplifying its portfolio and focusing on reducing investment costs, PERS has decided to divest investments in hedge funds.
What is a hedge fund? An aggressively managed portfolio of investments using sophisticated strategies such as leverage and long or short derivative positions to generate higher returns. It’s typically set up as a private investment partnership requiring a very large initial investment, often with restricted ability to liquidate investments. Hedge funds are also largely unregulated.
While the term hedge connotes the reduction of risk, hedge funds have evolved and often can carry more risk than the overall market because fund managers may make speculative or leveraged investments. Prior to the financial market meltdown, PERS’ own portfolio management was headed down this path – attempting to use leverage and other sophisticated strategies to hedge risk and beat the market.
PERS’ new strategy is based heavily on more traditional risk management strategies. As such, PERS investment staff decided that hedge fund investments are no longer a good fit for the pension fund. The performance of hedge funds also hasn’t seemed to warrant the added risk and fees they add to the portfolio. In a statement, Eliopoulos said, “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 hedge fund program “doesn’t merit a continued
The decision rocked the investment community since PERS serves as a role model for many other pension funds due to the size and sophistication of its investment operations. “I’m a little shocked at what CalPERS is doing,” said Charles J. Gradante, managing principal of the hedge fund advisory firm Hennessee Group. “Hedge funds are the place to be now because people are expecting a major correction. You’re looking at a very bumpy stock market over the next five years and that is where hedge funds will prove their mettle.” While others may study this decision by PERS, its hedge fund commitment has always been relatively small at under 1.5 percent of its total portfolio. Other public pension plans have allocated significantly higher proportions of their portfolios to hedge funds. Overall, the amount of money being put into hedge funds has been going up, not down.
However, this move by PERS is drawing focus on the spotty returns of hedge funds which have mostly underperformed the S&P in recent years despite high fees. While PERS has been careful not to criticize its hedge fund partners, others in the industry haven’t repaid the courtesy. “It’s an admission by CalPERS that they don’t have the right staff or the right managers,” Anthony Scaramucci, founder and co-managing partner of SkyBridge Capital, a global asset management firm, said regarding PERS’ decision to divest hedge fund holdings (insert sound of cat hissing here). Commodities and actively managed stock portfolios have also been the subject of recent discussions about the best fit for the PERS investment portfolio going forward. For now, these investment vehicles seem to be safe.
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