The California Public Employees’ Retirement System, the nation’s largest pension fund, will eliminate all of its hedge fund investments over the next year on concerns that investments are too complicated and expensive.
The pension fund, which oversees $300 billion, said on Monday that it would liquidate its positions in 24 hedge funds and six hedge fund-of-funds — investments that total $4 billion and more than 1 percent of its total investments under management.
The decision, after months of deliberation by the pension fund’s investment committee, comes as public pensions across the United States are beginning to assess their exposure to hedge funds. It is likely to reverberate across the investment community in the United States, where large investment funds look to Calpers as a model because of its size and the sophistication of its investments.
“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost and the lack of ability to scale at Calpers’ size,” the hedge fund program “doesn’t merit a continued role,” Ted Eliopoulos, the interim chief investment officer of Calpers, said in a statement.
Typically, hedge funds charge 2% of the fund plus 20% of any appreciation.
By comparison, Vanguard’s S&P 500 index fund has an expense ratio of 0.17%, and it turns out that they don’t generally outperform index funds, so you are not getting alpha (beating the market), and notwithstanding their protestations to the contrary, they don’t deliver lower volatility (beta) either, as is evidenced by the frequency that the almost cliched phrase, “Once high flying hedge fund,” appears in the financial press.
The reason that this is a big deal is not that this is a huge change in policy by Calpers, it only had a bit over 1% of its assets managed by hedge funds, but there are a lot of other public pensions out there that follow its lead, and if they start bailing, the hedgies will have to find honest work to make a living.
H/t naked capitalism, which had the best quote on the possibility of pension funds bailing on hedge funds:
One of my interlocutors said “OMG, hedgies will be jumping out of floor to ceiling windows in fancy modern building after throwing artsy pieces of modern furniture through them. There aren’t enough dumb enough rich investors to go around once the hedgies have lost the pension fund business. Short yachts, watch markers, GT cars, and Greenwich real estate.”
Look out below.
It’s gonna be raining Katz and Goldmans and Sachs.