Key Takeaways
- • CalPERS, the $300 billion second-largest U.S. pension fund, is divesting its entire $4 billion hedge fund allocation over the next year, citing high fees and underperformance relative to cost.
- • Hedge funds generated 7.1 percent returns as of June 30 but represented only 1 percent of CalPERS' portfolio and ranked among its least-successful asset class performers, trailing private equity by 3+ percentage points and public stocks throughout the recent market rally.
- • CalPERS' decision is triggering industry-wide debate among other pension managers about hedge fund allocations, with Missouri's $40 billion teachers retirement fund noting the discussion is "going on everywhere in our industry right now, given the high fees."
- • CalPERS has a history of setting trends in institutional investing—including pioneering pension fund commodities exposure in 2007—suggesting the hedge fund exit could prompt similar moves across the institutional investor universe.
- • The pension fund's acting chief investment officer confirmed the decision reflects a strategic pivot toward more cost-effective diversification alternatives, addressing long-standing pushback from CalPERS on hedge fund fee structures.
Summary
The California Public Employees' Retirement System announced this week its intention to exit the hedge fund space entirely, divesting $4 billion in holdings over the coming year. The move represents a significant statement from the nation's second-largest pension fund and is already catalyzing broader discussions within the institutional investor community about hedge fund allocations and their cost-benefit profile.
CalPERS' rationale centers on cost-effectiveness and relative performance. Despite delivering 7.1 percent returns as of June 30, hedge funds comprised just 1 percent of the $300 billion fund's portfolio and ranked among its weakest-performing asset classes. Private equity has outperformed hedge funds by 3 or more percentage points on average over several years, while public equities have also substantially exceeded hedge fund returns throughout the recent market rally. The fund's acting chief investment officer emphasized that the pension identified more cost-effective diversification strategies, a position that reflects CalPERS' sustained pressure on hedge fund fee structures—a concern that managers in the industry acknowledge has been a consistent negotiating point.
The decision carries particular weight given CalPERS' historical role as a trendsetter in institutional capital allocation. The fund pioneered pension commitments to commodities in 2007, spurring widespread institutional adoption before subsequently reducing those positions after underperformance. This pattern suggests the hedge fund exit may similarly influence peer institutions. Steve Yoakum, executive director of Missouri's $40 billion teachers retirement fund, confirmed in a CNBC interview that hedge fund allocation is "a discussion that's going on everywhere in our industry right now, given the high fees and what's going on with hedge funds."
The divestment represents a culmination of CalPERS' lengthy review process regarding hedge fund investments, which the fund has held for more than a decade. While the $4 billion represents a material allocation for CalPERS, it underscores a broader institutional shift toward questioning whether hedge fund fee structures justify their return profile relative to alternative strategies.
CalPERS' rationale centers on cost-effectiveness and relative performance. Despite delivering 7.1 percent returns as of June 30, hedge funds comprised just 1 percent of the $300 billion fund's portfolio and ranked among its weakest-performing asset classes. Private equity has outperformed hedge funds by 3 or more percentage points on average over several years, while public equities have also substantially exceeded hedge fund returns throughout the recent market rally. The fund's acting chief investment officer emphasized that the pension identified more cost-effective diversification strategies, a position that reflects CalPERS' sustained pressure on hedge fund fee structures—a concern that managers in the industry acknowledge has been a consistent negotiating point.
The decision carries particular weight given CalPERS' historical role as a trendsetter in institutional capital allocation. The fund pioneered pension commitments to commodities in 2007, spurring widespread institutional adoption before subsequently reducing those positions after underperformance. This pattern suggests the hedge fund exit may similarly influence peer institutions. Steve Yoakum, executive director of Missouri's $40 billion teachers retirement fund, confirmed in a CNBC interview that hedge fund allocation is "a discussion that's going on everywhere in our industry right now, given the high fees and what's going on with hedge funds."
The divestment represents a culmination of CalPERS' lengthy review process regarding hedge fund investments, which the fund has held for more than a decade. While the $4 billion represents a material allocation for CalPERS, it underscores a broader institutional shift toward questioning whether hedge fund fee structures justify their return profile relative to alternative strategies.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.