The California Public Employees’ Retirement System (CalPERS) is to dump $4 billion worth of hedge fund investments, citing the asset class’ high costs, complexity, and lack of scale.
The dramatic move, announced last night, will see the $300 billion pension sell out of 24 hedge funds and six funds-of-funds in its “Absolute Return Strategies” (ARS) program.
Interim CIO Ted Eliopoulos said in a statement that due to “complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted”.
“Hedge funds are certainly a viable strategy for some, but at the end of the day, their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted.”—Ted Eliopoulos, CalPERS interim CIO. The ARS section of CalPERS portfolio currently makes up approximately 1.3% of the pension’s assets. This will be wound down over the next 12 months, with staff being given alternative roles in the investment office.
Eliopoulos said: “The staff dedicated to our program have worked diligently and we will ensure that their talent can continue to help CalPERS meet its investment objectives.”
The US’ biggest pension cited its “investment beliefs”, a set of principles introduced in September 2013, as backing up its approach the ARS program. Among the 10 investment beliefs, the pension states it will “take risk only where we have a strong belief we will be rewarded for it”, and “costs matter and need to be effectively managed”.
Henry Jones, CalPERS board member and chair of the investment committee, said: “While the ARS analysis was no simple matter for CalPERS, the investment beliefs provide guidance for a straightforward and principled conclusion that fits our needs.”
Although the pension said performance was not a factor in the decision, according to the pension’s June 2013 annual financial report, the ARS section lagged its benchmark with a 5% annualized return over 10 years. The same report listed 27 funds in the portfolio, and stated that CalPERS had paid $60.7 million in management fees and $55 million in performance fees for the 12 months to the end of June 2013.
Among the managers set to be axed by CalPERS are Och-Ziff Capital Management, Lansdowne Partners, and Pacific Alternative Asset Management Company.
CalPERS was hit hard during the financial crisis, losing 5.1% in 2008 and 24% in 2009, which provided the trigger for an overhaul of the pension’s strategy.
CalPERS hinted that the ARS section of its portfolio was facing changes in July this year, but it was implied that exposure would reduce, rather than be eliminated entirely. Craig Dandurand, who was a senior member of the hedge fund team at CalPERS, left the pension in December to join the Australian pension Future Fund.
CalPERS was yesterday nominated in CIO’s Innovation Awards in the Public Defined Benefit Plan Above $100 Billion category. The awards will take place in New York in December.