The California Public Employees’ Retirement System’s (CalPERS) recent move to abandon its $4.5 billion hedge fund portfolio will shrink the asset bases of 30 managers—including some big names and a disproportionate number of female-led funds.
Daniel Och’s Och-Ziff Capital Management Group, which ran a total of $722 million for the pension as of 2013 via its OZ Eureka Funds and OZ Domestic Partners II vehicles, is the biggest loser in terms of absolute assets lost. However, CalPERS’ withdrawal will barely register on the New York-based manager’s $46.1 billion investment pool. (Many of the funds, run as separate accounts, contain California gold rush references like “Eureka” and “1848.”)
Next in line is Black River Asset Management—a commodity specialist owned by Cargill, America’s largest private corporation—which managed $642 million for CalPERS. The pension represents nearly 10% of its approximately $7 billion holdings.
"The problem wasn't that they had a hedge fund portfolio. It was that they did a poor job in building one."
New Jersey-based Chatham Asset Management stands to lose the third-most, handling $575 million belonging to the California pension. The firm has recently been in the news over union accusations that it tried to influence pension allocation decisions in Republican led-New Jersey through donations to the party’s national committee.
Other hedge fund managers affected by the cut include Bain Capital (via its Brookside funds), Symphony Asset Management, Partners Fund Management, UBS’ O’Connor, Canyon Capital, and Lansdowne Partners.
Women-Led Funds Lose
Funds impacted by CalPERS’ exit from the asset class include an unusually high proportion of women-led businesses. Among the list of hedge funds and funds-of-funds that will lose assets are Jane Buchan’s Pacific Alternative Asset Management Co. (PAAMCO, $264 million), Leda Braga’s BlueCrest Capital Management ($253 million), and Claude Porret’s 47 Degrees North Capital Management ($180 million).
This represents 10% of the 24 hedge funds and six funds-of-funds soon to be fired by CalPERS. Best estimates of the hedge fund industry peg female ownership at 3%.
CalPERS paid $135 million in fees to these 30 managers in the fiscal year that ended June 30, and saw an average return of 7.1% over the same timeframe.
Industry Insider Response? Meh.
Despite the dollar drawdown seen by these hedge funds in absolute terms, industry insiders have largely brushed off the move in relative terms.
“The bottom line is that a $4 billion allocation by a plan as big as CalPERS is a drop in the bucket—and clearly [was] never a big focus,” said one bulge-bracket bank employee who works closely with pension plans and hedge funds. Former CIO “Joe Dear’s unfortunate passing hastened the move away from alternatives because his successor”—Ted Eliopoulos, who was named to the position late last week—“never bought into it in the first place. Without an internal ally, it was doomed.”
Another individual—a hedge fund employee with no connection to CalPERS but who is familiar with the situation—said the issue wasn’t hedge funds as an asset class, but the portfolio CalPERS had built.
“The notable problem isn’t the lack of big names,” he said, “but the likelihood that most of the hedge in their portfolio are mostly equity-driven. I’m guessing that the beta of the hedge portfolio to the equity market is very high. The problem wasn't that they had a hedge fund portfolio. It was that they did a poor job in building one.”
Statistics also put CalPERS’ action into perspective: According to figures from eVestment, total global hedge fund assets reached $3 trillion in June. CalPERS’ contribution to this? At $4.5 billion, 0.15% of the industry total.
[An earlier version of the story used 2012 CalPERS figures, the result of which had Black River Asset Management losing the most capital in absolute terms: Updated figures move Och-Ziff into that position. All other figures have been adjusted accordingly.]