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CalPERS Officials Propose Hedge Fund Program Chang

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SACRAMENTO, Calif.(–The US$1 billion commitment to hedge funds by the largest U.S. pension plan might be undergoing some changes following its trustees June meeting.

The California Public Employees’ Retirement System plans to create a “spring-fed pool” of advisers to assist the US$134 billion pension fund in managing its hedge fund program, which will be called an absolute return strategies program. At the investment committee’s June meeting, staff will recommend an additional allocation to hedge funds, according to board meeting documents posted on the pension fund’s web site.

Blackstone Alternative Asset Management, which was hired last May as the fund’s strategic partner, will be included in the pool of advisers (Previous HedgeWorld Story). BAAM’s contract expires June 30. Officials also are expected to hire State Street International Fund Services portfolio management system to provide increased portfolio transparency and risk analysis for the absolute return strategies program.

So far, CalPERS has allocated more than half of its initial US$1 billion that was slated for hedge funds in November 2000 (Previous HedgeWorld Story). So far, US$555 million has been invested in various hedge funds strategies. Those investments are: Andor Technology Fund (US$50 million); Apex-Zaxis Partners LP (US$40 million); Atticus Global LP (US$40 million); Brookside Capital LP (US$75 million); EVA-Pentangle (US$40 million); Farallon Offshore (US$50 million); Landsdowne European Ltd. (US$25 million); Liberty Square Offshore (US$40 million); Tosca (US$50 million); Matador Capital Management (US$25 million); Tremblant Partners (US$35 million); Welch Entrepreneurial (US$25 million); and Symphony (US$50 million).

The latest allocations to hedge funds were made in December and January totaling US$95 million. A total of US$25 million each went to Matador’s Everglades Partners LP; the Lansdowne European Strategic Equity Fund LP; and Brookside Capital LP. Follow-on investments of US$10 million each were made in Tremblant Partners and in Symphony’s Rhapsody program.

From April 2002 through year-end, the program posted a 2.4% return gross of fees, as compared with its benchmark (50% Wilshire 2500 index and 50% U.S. one-year Treasuries) that had a return of negative 7.7%.

The new absolute return strategies hedge fund program at CalPERS is actually part of the continual evolution of the pension fund’s entry into the hedge fund market. The investment approach has its roots in the alternative investment management program receiving approval to invest in hedge funds and hybrid investments in November 1996 and the approval within the global equity asset class in August 1999.

The investment committee approved a hybrid fund investment program during the late 1990s under the global public markets unit. The fund invested in both Pivotal Partners and the Abacus Fund. Given reports of mixed results for those two funds, the pension fund is giving its program more explicit guidelines.

Included in those guidelines is a listing of hedge fund investment styles that will be considered for the program. Those strategies are: convertible arbitrage, statistical arbitrage, merger/transaction arbitrage, long/short equity funds, cross-over funds and market neutral funds. None of the funds in the program will be allowed to exceed leverage of 100% of existing capital.

The return target for the allocation is the one-year Treasury bill rate plus 7% over a full market cycle of three to five years. This long-term return will be achieved, as slated, at a risk level no greater than the expected volatility of the Wilshire 2500 index.

The program also stipulates that CalPERS’ staff will evaluate investment opportunities that include the possibility of obtaining equity stakes in the management firms.

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