Posted: September 16, 2014 | by: Thomas F. McKeon, CFA
The largest U.S. public pension is getting out of hedge funds as part of an effort to simplify its assets and reduce costs.
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The Wall Street Journal is reporting today that the California Public Employees' Retirement System said Monday it would shed its entire $4 billion investment in hedge funds over the next year.
From the WSJ:
The pension known by the abbreviation Calpers, which manages $298 billion in investments and benefits for 1.6 million current and retired police officers, firefighters and other public employees, is a bellwether for investment trends at other public plans. Any shift it makes will likely influence others because of its size and history as an early adopter of alternatives to stocks and bonds.
Many public pension plans have been discussing how much risk to take in their portfolios as they face billions in unfunded obligations to workers.
"Hedge funds are certainly a viable strategy for some," said Ted Eliopoulos, interim chief investment officer at Calpers, in a statement. For Calpers, the program "doesn't merit a continued role" due to how complex and costly the funds can be, he said.
Aggregate hedge fund returns have been pedestrian for quite some time. As such, hedge fund marketing has pivoted away from promoting returns to promoting the "low correlation" of their returns to equities.
We at Clothier Springs Capital Management have long wondered when institutional investors would wake up and recognize the highly dubious and expensive hedge fund proposition. If at the end of the day all hedge funds really have to offer is "low correlation" there are plenty of better and less expensive ways to get it than paying 2% and 20%.
Stay tuned....a seismic shift may be coming.