Key Takeaways
- • CalPERS, the nation's largest pension fund with $296 billion in assets, announced the termination of its $4 billion Absolute Return Strategies portfolio, citing fees, complexity, and inability to scale as primary drivers of the decision.
- • The hedge fund industry faces performance headwinds: while the S&P 500 returned 32.36 percent in 2013, the average hedge fund gained only 9.13 percent, yet managers of major firms continue earning substantial compensation through fee structures (Dan Och of Och-Ziff earned $400 million in 2013).
- • CalPERS will redeem from 24 hedge funds and six funds-of-hedge-funds, with interim CIO Ted Eliopoulos stating that "hedge funds are certainly a viable strategy for some, but...the ARS program is no longer warranted" when judged against complexity and cost at CalPERS's scale.
- • The CalPERS decision does not signal a broad industry retreat—the headline explicitly cautions against interpreting this move as heralding hedge funds' decline despite CalPERS's 2001 entry helping catalyze peer adoption of absolute-return strategies.
Summary
CalPERS's announcement last month to liquidate its Absolute Return Strategies portfolio marks a significant reassessment of hedge fund allocation at the nation's largest public pension plan, though industry observers caution against viewing the move as a harbinger of systemic retreat from alternative investments. The $296 billion California Public Employees' Retirement System will terminate positions across 24 hedge funds and six hedge fund-of-funds representing approximately $4 billion in assets, a decision grounded in economic and operational considerations rather than ideological rejection of the strategy class.
The timing of CalPERS's exit reflects mounting pressure on public pension funds to justify investment practices under heightened public and political scrutiny. With underfunded pension obligations nationwide and pension reform emerging as a consequential electoral issue, plans face intensifying questions about fee structures and returns. The disconnect between hedge fund performance and compensation has become particularly acute: while the S&P 500 delivered 32.36 percent returns in 2013, the HFRI Fund Weighted Composite Index showed the average hedge fund posting merely 9.13 percent gains. Yet despite this performance gap, elite hedge fund managers continue commanding substantial economic rents—Dan Och, chairman and CEO of Och-Ziff Capital Management, earned $400 million in 2013, representing compensation more than 10,000 times the typical California public retiree's pension payout.
Interim Chief Investment Officer Ted Eliopoulos framed CalPERS's decision pragmatically rather than categorically, stating that "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's size, the ARS program is no longer warranted." This articulation distinguishes between hedge funds as a general asset class and their appropriateness for a fund of CalPERS's magnitude, suggesting that operational constraints and fee drag became untenable at scale rather than fundamental strategy failure.
The significance of CalPERS's move carries particular weight given the fund's historical role in legitimizing hedge fund allocation among public pensions. CalPERS's 2001 decision to establish a substantial hedge fund program effectively catalyzed industry-wide adoption of absolute-return strategies among comparable institutional investors. Yet the current exit, while notable, should not be construed as signaling an industry-wide retrenchment—rather, it reflects CalPERS's specific cost-benefit calculation at its asset scale and performance relative to fee obligations.
The timing of CalPERS's exit reflects mounting pressure on public pension funds to justify investment practices under heightened public and political scrutiny. With underfunded pension obligations nationwide and pension reform emerging as a consequential electoral issue, plans face intensifying questions about fee structures and returns. The disconnect between hedge fund performance and compensation has become particularly acute: while the S&P 500 delivered 32.36 percent returns in 2013, the HFRI Fund Weighted Composite Index showed the average hedge fund posting merely 9.13 percent gains. Yet despite this performance gap, elite hedge fund managers continue commanding substantial economic rents—Dan Och, chairman and CEO of Och-Ziff Capital Management, earned $400 million in 2013, representing compensation more than 10,000 times the typical California public retiree's pension payout.
Interim Chief Investment Officer Ted Eliopoulos framed CalPERS's decision pragmatically rather than categorically, stating that "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's size, the ARS program is no longer warranted." This articulation distinguishes between hedge funds as a general asset class and their appropriateness for a fund of CalPERS's magnitude, suggesting that operational constraints and fee drag became untenable at scale rather than fundamental strategy failure.
The significance of CalPERS's move carries particular weight given the fund's historical role in legitimizing hedge fund allocation among public pensions. CalPERS's 2001 decision to establish a substantial hedge fund program effectively catalyzed industry-wide adoption of absolute-return strategies among comparable institutional investors. Yet the current exit, while notable, should not be construed as signaling an industry-wide retrenchment—rather, it reflects CalPERS's specific cost-benefit calculation at its asset scale and performance relative to fee obligations.
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