The California Public Employees’ Retirement System’s withdrawal from hedge funds will prompt some public pensions that invest in hedge funds to follow suit and give others pause, but seems unlikely to seriously dampen retirement systems’ appetite for these alternative products.
CalPERS announced Sept. 15 that it would phase out its Absolute Return Strategies hedge fund program as part of an ongoing effort to reduce complexity and costs in its investment program.
The big pension fund’s move was not totally unexpected. In May, Calpers announced that it would halve its hedge allocation by September as part of a re-evaluation process. The hedge fund program had been under review since early in the year following the death of Chief Investment Officer John Dear and his replacement by Ted Eliopoulos.
ARS was a grand “experiment” that ultimately proved unsustainable, according to Jack Rivkin, chief investment officer of Altegris, which offers a range of alternative strategies to retail investors in a mutual fund structure.
Calpers invested vast resources to conduct in-house due diligence on individual hedge fund managers to make direct investments across a wide spectrum of strategies. “The combination of performance relative to cost finally proved too expensive,” Rivkin told ThinkAdvisor.
The pension might have been better off outsourcing its hedge fund allocation to a funds of funds, which are in the business of vetting hedge funds and can do so in a scalable manner, he said.
No Mass Exodus
Rivkin said CalPERS’ decision would give other public pension funds a lot to think about, and that a segment of them would end their hedge fund programs.
However, a rush to the exits seems unlikely in the wake of the pension fund’s announcement, according to Preqin, an alternatives data provider.
“For now at least, this does not seem to be the case, and in fact, there are more U.S. public pension funds than ever before allocating capital to hedge funds, and these investors are investing the most they ever have in the asset class,” Amy Bensted, head of hedge fund products at Preqin, said in an email message. “Public pension funds have increasingly recognized the value of hedge funds as part of a diversified portfolio,” Bensted said.
CalPERS’ withdrawal from the asset class may cause some investors to look more closely at their current allocation model, she said, but “the importance of hedge funds as a source of risk-adjusted returns for these investors is likely to continue to prove attractive for U.S. retirement schemes.”