Key Takeaways
- • CalPERS liquidates entire $4 billion hedge fund portfolio across 24 hedge funds and six fund-of-funds, representing more than 1% of the nation's largest pension fund's $300 billion in assets under management.
- • Cost and complexity cited as primary drivers — interim Chief Investment Officer Ted Eliopoulos stated the hedge fund program "doesn't merit a continued role" when judged against complexity, cost, and inability to scale at CalPERS' institutional size.
- • Annual fee burden of $135 million was being paid by CalPERS for hedge fund exposure, highlighting the cost structure concerns that prompted the strategic exit decision.
- • Decision signals broader institutional reassessment of hedge fund allocations across U.S. public pensions and institutional investors, with CalPERS' move likely to reverberate across the investment community given its size and market influence as the largest U.S. public pension.
- • Contrarian market view from hedge fund industry — Hennessee Group's Charles J. Gradante disputed the decision, arguing hedge funds will "prove their mettle" during expected market corrections and volatility over the next five years.
Summary
The California Public Employees' Retirement System (CalPERS), the nation's largest pension fund managing $300 billion in assets, announced on September 15, 2014, that it will fully exit its hedge fund investments by liquidating all positions across 24 hedge funds and six hedge fund-of-funds totaling approximately $4 billion. The decision, reached after months of deliberation by CalPERS' investment committee, marks a significant strategic pivot for the institution serving 1.6 million teachers, police officers, firefighters, and other public employees.
The primary rationale centers on three concerns: excessive complexity, high fees, and scalability constraints. Ted Eliopoulos, CalPERS' interim Chief Investment Officer, articulated the fund's position in a statement, noting that hedge funds, while "certainly a viable strategy for some," fail to justify their continued role when assessed against their operational complexity and cost structure relative to the fund's massive size. The hedge fund program's annual fee burden reached $135 million, representing a significant expense that influenced the institutional review.
CalPERS' decision arrives amid growing scrutiny of hedge fund fee structures across the pension industry. An expanding cohort of institutional investors and public pension funds have begun reassessing their hedge fund exposure, questioning whether performance justifies the elevated cost structures typical of the sector. However, the move generated pushback from industry participants. Charles J. Gradante, managing principal of hedge fund advisory firm Hennessee Group, expressed surprise at the decision, contending that hedge funds represent optimal positioning given anticipated market volatility and corrections over the subsequent five-year period—periods where hedge fund hedging strategies historically deliver value.
CalPERS has not yet disclosed where the $4 billion from liquidated positions will be reallocated. Given CalPERS' stature as the largest U.S. public pension and its reputation as an influential institutional investor, the decision is expected to prompt similar reviews among other large pension funds and institutional allocators nationwide, potentially accelerating a broader industry trend away from hedge fund allocations or toward more selective exposure models.
The primary rationale centers on three concerns: excessive complexity, high fees, and scalability constraints. Ted Eliopoulos, CalPERS' interim Chief Investment Officer, articulated the fund's position in a statement, noting that hedge funds, while "certainly a viable strategy for some," fail to justify their continued role when assessed against their operational complexity and cost structure relative to the fund's massive size. The hedge fund program's annual fee burden reached $135 million, representing a significant expense that influenced the institutional review.
CalPERS' decision arrives amid growing scrutiny of hedge fund fee structures across the pension industry. An expanding cohort of institutional investors and public pension funds have begun reassessing their hedge fund exposure, questioning whether performance justifies the elevated cost structures typical of the sector. However, the move generated pushback from industry participants. Charles J. Gradante, managing principal of hedge fund advisory firm Hennessee Group, expressed surprise at the decision, contending that hedge funds represent optimal positioning given anticipated market volatility and corrections over the subsequent five-year period—periods where hedge fund hedging strategies historically deliver value.
CalPERS has not yet disclosed where the $4 billion from liquidated positions will be reallocated. Given CalPERS' stature as the largest U.S. public pension and its reputation as an influential institutional investor, the decision is expected to prompt similar reviews among other large pension funds and institutional allocators nationwide, potentially accelerating a broader industry trend away from hedge fund allocations or toward more selective exposure models.
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.