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September 16, 2014 at 09:25 AM
The California Public Employees’ Retirement System’s decision to divest its entire $4 billion from hedge funds came after officials concluded the program couldn’t be expanded enough to justify the costs.
“Our hedge fund allocation was quite small,” interim Chief Investment Officer Ted Eliopoulos said Tuesday on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “It did not offer us the ability or the promise to effectively diversify or hedge any meaningful portion of our total portfolio.”
The $298 billion pension, known as Calpers, said yesterday it would eliminate 24 hedge funds and six hedge fund-of-funds. The decision isn’t related to the performance of the program, Eliopoulos said. The board hasn’t decided where to invest the money after the pullout, which will take about a year, he said.
The largest U.S. pension is getting out of hedge funds even as other large public plans such as New Jersey’s add to the private portfolios. Calpers has been working to reduce risk after the global financial crisis wiped out more than a third of its wealth, forcing it to increase contributions from taxpayers to cover losses. Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.
Fund Fees
The pension fund paid $135 million in fees in the fiscal year that ended June 30 for hedge fund investments that earned 7.1%, contributing 0.4% to its total return, according to Calpers figures.
“We do not believe for Calpers’ scale, that we could grow the hedge-fund program to a scale that would be meaningful,” Eliopoulos said in the television interview.
Because of its size, Calpers is often a trend setter among pension funds on investment strategies, said Keith Brainard, research director of the National Association of State Retirement Administrators.
“I would expect their decision to divest from hedge funds will cause some public pension funds to re-evaluate their hedge fund strategy, although many public pension funds consider hedge funds to be a vital part of their diversified portfolios,” Brainard said yesterday by e-mail.
Calpers earned 18.4% in the fiscal year as global stock indexes rose to records. The fund’s market value reached $300 billion for the first time July 3, making it bigger than all but two companies on the Dow Jones Industrial Average.
Alternative Investments
The pension invests in funds run by Och-Ziff Capital Management Group LLC, Bain Capital LLC’s Brookside Capital and Lansdowne Partners LP, according to a report from Calpers. Its fund-of-funds investments include funds run by Rock Creek Group LLC and Pacific Alternative Asset Management Co.
