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.
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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.