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CalPERS Raises Its Stake

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In November, the California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund with assets totaling $168 billion, said it will increase its allocation to its hedge fund program, earmarking an additional $500 million for investment in hedge funds-of-funds.

The move will double the pension fund’s total investments to hedge funds to $2 billion. In 2000, CalPERS established a $1 billion program that made only direct investments in hedge funds.

The action also continues a push by the pension fund to move more of its assets to non-traditional investment strategies that generate greater risk-adjusted returns.

Presently, CalPERS has invested approximately $925 million in 15 hedge funds and is expected to allocate the remainder of its original $1 billion allocation by the end of the year. The pension fund’s hedge fund investments have returned 5.6% since 2000, exceeding the 1.6% annual gain of the Wilshire 2500 public stock index during the same period. In addition, volatility in CalPERS’ hedge fund portfolio has had only one-fourth the volatility that exists in its overall U.S. stock portfolio.

A Dry Spell for Hedge Funds

The CalPERS announcement in November came on the heels of what investors hope to be the end of a mid-year dry spell for hedge fund returns. Hedge fund managers active in directional and event-driven strategies led the S&P Hedge Fund Index to post a gain of 0.72% for October, the third straight positive month for the index.

The gain signals a slight comeback for the index, which has been posting small gains over the last three months after a several-month slump. Still, the hedge fund tracker is up only 1.15% for the year through October.

By contrast, for those focused on long/short equity, managed futures, and macro strategies, the markets worked in their favor. The S&P Directional/Tactical Index, which is made up of those strategies, reported a gain of 1.45% last month. The weakening U.S. dollar against the Swiss franc, Japanese yen, and the euro might have helped macro managers and others in the index.

Rising crude oil and natural gas prices undoubtedly were a boon to managed futures managers, with the S&P Managed Futures Index returning 5.56% for the month and 0.27% for the year, topping the overall sub-indexes. Despite the strong gains in managed futures, the directional/tactical index is still in negative territory for the year, down 1.11%.

A Market-Neutral Drag

The S&P Arbitrage Index dipped in October by 0.13% as returns for equity market-neutral managers continue to drag performance for the index. Fixed-income-oriented managers fared better, thanks to mortgage-backed securities traders who took advantage of a relatively stable prepayment environment and low volatility trends. For the year the arbitrage index is up 1.76%.

The S&P Event Driven Index outperformed the composite index with a gain of 0.86% in October. Distressed and special situation investing contributed to the gain, with the positive reevaluation of a number of companies in the energy and industrial sectors, according to S&P officials.–Jeff Joseph

Jeff Joseph is managing director of Rydex Capital Partners and serves on the advisory board of HedgeWorld (, a global provider of hedge fund information and investment products.

Have a hedge fund question? Contact Jeff Joseph at [email protected].

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