In San Francisco, the chairman of that city’s pension fund
has put on hold a vote to invest 15% of its assets in hedge funds. In Austin,
Texas, officers responsible for the retirement savings of city police officers
are discussing whether to withdraw all of their hedge-fund investments. In
Harrisburg, Pa., a prominent state official asked the systems that manage money
for teachers and other public workers to reconsider the $7.6 billion parked in
The new conversations were spurred by Calpers, the largest
U.S. public pension fund, which last month decided to shed its entire $4
billion in hedge-fund investments over the next year. Calpers said the
investments were too small a slice of its $298 billion portfolio to justify the
time and expense they required.
So far, those talks haven’t led to widespread exits. But the
concerns offer evidence that public pension funds are reconsidering their
decade long pursuit of hedge funds as an alternative way of boosting long-term
returns and closing funding gaps.
At stake for hedge funds is billions of dollars in
investments made by public pension funds on behalf of public-sector employees.
Over the past decade, pensions have increasingly moved away from stocks and
bonds and put money into investments such as hedge funds, real estate and private
equity as alternatives to stocks and bonds. Now, about half of the U.S. public
pensions have some sort of hedge-fund investment, according to data tracker
Hedge funds typically bet on and against stocks, bonds or
other securities, often using borrowed money. That can amplify their gains and
their losses. Hedge funds also charge higher fees than other money managers,
usually 2% of assets under management and 20% of profits.
Average public-pension gains from hedge funds were 3.6% for
the three years ended March 31, according to a review of public pensions with
more than $1 billion in assets by Wilshire Trust Universe Comparison Service.
That compared with a 10.9% return from private equity, a 10.6% return from
stocks and 5.7% from fixed-income investments.
After peaking at 1.81% in 2011, pension allocations to hedge
funds fell to 1.35% of total portfolios as of June 30, according to Wilshire.
Calpers wields hefty influence among public pensions, due in
large part to its size and history as an early adopter of alternative
investments to stocks and bonds. When the pension fund waded into hedge funds
14 years ago, it was among the first to do so. It is unclear where much of this
money could end up, but Calpers officials have said they want to increase their
Investors of all types continue to pour money into hedge
funds, but there are indications they aren’t quite as enamored with big funds
as they once were. The hedge-fund industry managed a record $2.82 trillion at the
end of the third quarter, an increase of $18 billion, or 0.6%, from the prior
quarter, according to HFR.
Investors added $15.9 billion of new capital to hedge funds
in the quarter, a decline from $30.5 billion of new money in the second
quarter. And for the first time since 2009, big funds saw less new money than
Even Calpers had some of the same internal debates about the
merits of hedge funds before deciding to exit. In the years leading up to the
move there was widespread disagreement about the investments. Some officials
pushed to put even more money into hedge funds. Others openly doubted the
ability of hedge funds to serve as a buffer during times of stress.
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