The largest U.S. public pension plan is getting out of hedge
funds as part of an effort to simplify its assets and reduce costs, a retreat
that could prompt other cities and states to consider similar moves. The
California Public Employees' Retirement System said Monday it would shed its
entire $4 billion investment in hedge funds over the next year.
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.
The dramatic exodus at Calpers follows a review of the
hedge-fund portfolio that began in March, following the death of former
chief investment officer Joseph Dear. Calpers officials began raising
questions about whether hedge funds are too complicated or can effectively
counterbalance poorly performing equities during a market crash, said people
familiar with the situation. The fund hasn't yet selected a permanent successor
to Mr. Dear.
Public pensions began wading into hedge funds roughly a decade
ago as they sought to boost long-term returns and close the gap between assets
and future obligations to retirees. Hedge funds typically bet on and against
stocks, bonds or other securities, often using borrowed money. Because of their
relative complexity, hedge funds also charge higher fees than other money
managers.
The move into hedge funds was part of a larger embrace of
so-called alternative investments, including private equity and real estate, as
pension officials hoped bigger investment gains would help them avoid
extracting bigger contributions from employees or reducing benefits for current
or future retirees. Many hedge funds dropped less than then overall market
during the financial crisis.
The decision, according to Calpers, wasn't based on the
performance of the program, which earned 7.1% during a fiscal year when all of
Calpers returned 18.4%. Calpers expects to report that it paid out $135 million
in hedge funds fees during the year ending June 30, 2014, up from $115 million
the year before.
The Wall Street Journal reported last month that Calpers was
considering retreating broadly from riskier assets, including hedge funds.
Bloomberg News earlier Monday reported Calpers's decision to exit hedge funds. Other
pensions also are debating whether to avoid hedge funds altogether.
The second-largest U.S. public pension, the California State
Teachers' Retirement System, will be evaluating its hedge-fund investments at
the end of this year following a three-year experiment in which it allocated
$700 million to such strategies. It was the first foray into such investments,
and in the last year its gain from hedge funds was 0.13%, lowest among all
asset classes in the fund.
The reconsideration of hedge funds as an investment option
hasn't yet produced dramatic shifts inside all funds. Some big public pensions
say they are holding firm on their commitments or increasing their allocations
as they worry about how stocks will perform in a future downturn. About half of
the U.S. public pensions still have some sort of hedge fund investment,
according to data tracker Preqin.
But hedge-fund allocations began dropping in the years following
a 2011 peak, according to data compiled by the Wilshire Trust Universe
Comparison Service, while the average amount committed to private equity, by
comparison, is still climbing. Stocks and bonds are still the dominant
investments for all public pensions.
Average public-pension gains from hedge funds were 3.6% for
the three years ending March 31 as compared with a 10.9% return from
private-equity investments, a 10.6% return from stocks and 5.7% from
fixed-income investments, according to a review of public pensions with more
than $1 billion in assets conducted by Wilshire.
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