Calpers to quit hedge funds and put US$4b to work elsewhere
California pension scheme undecided on where to move investment as it seeks to lower costs
Although the Hong Kong Jockey Club finds them increasingly attractive, hedge funds are being scratched from the investment line-up at the biggest pension fund in the United States.
The California Public Employees' Retirement System (Calpers) plans to divest the entire US$4 billion that it has with the funds, saying they are too expensive and complex.
The decision to eliminate 24 hedge funds and six hedge fund-of-funds, was not related to the performance of the programme, said Ted Eliopoulos, the interim chief investment officer. The board of the US$298 billion pension fund had not decided where to invest the money after the pull-out, which will take about a year, he said.
"We concluded that we would eliminate the hedge fund programme in order to reduce the complexity, reduce the costs in the programme, particularly in relation to our view that given the scale of Calpers, we would not be able to scale a hedge fund programme to a size that would really move the needle," Eliopoulos said.
Calpers is getting out of hedge funds as the Jockey Club seeks to land better returns than traditional investments in bonds and equities. Alternative investments accounted for HK$5.02 billion of the non-profit making organisation's HK$8.24 billion long-term investment portfolio at the end of June, up 24.29 per cent from HK$4.04 billion at the same time last year, it said in its annual report.
Calpers' state pension plan peers in the US, like New Jersey's fund, have also been increasing their exposure to hedge funds.
But the California state employee fund has been working to reduce risk after the global financial crisis wiped out more than a third of its wealth. Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.
The pension fund paid US$135 million in fees in the fiscal year to June 30 for hedge fund investments that earned 7.1 per cent, contributing 0.4 per cent to its total return, according to Calpers figures.
It earned 18.4 per cent in the fiscal year as global stock indices rose to records. The fund's market value reached US$300 billion on July 3, making it bigger than all but two companies on the Dow Jones Industrial Average.
The pension invests in funds run by Och-Ziff Capital Management Group, Bain Capital's Brookside Capital, Lansdowne Partners and Canyon Partners, according to a report from Calpers. Its fund-of-funds investments include funds run by Rock Creek Group and Pacific Alternative Asset Management.
Calpers' return goal is 7.5 per cent. The annualised rate of return on its hedge fund investments over the past 10 years is 4.8 per cent.
Hedge funds have amassed a record US$2.8 trillion in assets as institutional investors pour money into alternative investments. Consultancy McKinsey said last month that assets in alternatives, which also include real estate and private equity, may reach US$14.7 trillion by 2020, double the current level.
