Key Takeaways
- • CalPERS, the largest U.S. pension fund with over $600 billion in assets under management, is divesting its entire $4 billion hedge fund allocation, effective immediately.
- • The pension fund paid $135 million in fees during fiscal year ending June 30 on hedge fund investments that generated only 7.1 percent returns, cited as a primary driver of the exit decision.
- • CalPERS eliminated its Absolute Return Strategies (ARS) program due to high costs, complexity, and underperformance relative to fees, representing a significant vote of no-confidence in hedge fund value proposition for large institutional investors.
- • Blackstone, a long-term partner of CalPERS, publicly backed the decision to exit hedge funds, signaling potential industry realignment among alternative asset managers.
- • The move highlights divergent strategies among major public pension funds, with CalSTRS simultaneously increasing hedge fund allocations while CalPERS exits the asset class entirely.
Summary
The California Public Employees' Retirement System announced on September 15, 2014, that it will liquidate its entire $4 billion hedge fund portfolio, marking a significant institutional rejection of the alternative asset class. As the nation's largest defined-benefit pension fund managing retirement benefits for more than 2 million members, CalPERS' decision carries substantial weight in investment markets and signals growing institutional skepticism about hedge fund economics.
The primary rationale for the exit centers on cost and performance misalignment. CalPERS disclosed that it paid $135 million in fees during the fiscal year ending June 30 for hedge fund investments that delivered only 7.1 percent returns. The fund characterized the program as costly and overly complex relative to the value generated. This cost-to-performance ratio formed the basis of CalPERS' determination to eliminate its Absolute Return Strategies (ARS) program entirely as part of broader portfolio optimization efforts.
The decision drew notable support from Blackstone, a major hedge fund operator and long-standing investment partner of CalPERS, which publicly endorsed the pension fund's reasoning. This endorsement from a prominent industry participant underscores the legitimacy of concerns regarding hedge fund fee structures and their sustainability for institutional investors managing massive capital bases with fiduciary obligations to beneficiaries.
The CalPERS exit reflects broader tensions within the institutional investment community regarding alternative assets. While CalPERS completely exits hedge fund exposure, the California State Teachers' Retirement System (CalSTRS) is simultaneously expanding its hedge fund commitments, demonstrating that large pension funds are adopting divergent strategies toward the asset class based on their individual cost-benefit analyses and risk management philosophies.
The primary rationale for the exit centers on cost and performance misalignment. CalPERS disclosed that it paid $135 million in fees during the fiscal year ending June 30 for hedge fund investments that delivered only 7.1 percent returns. The fund characterized the program as costly and overly complex relative to the value generated. This cost-to-performance ratio formed the basis of CalPERS' determination to eliminate its Absolute Return Strategies (ARS) program entirely as part of broader portfolio optimization efforts.
The decision drew notable support from Blackstone, a major hedge fund operator and long-standing investment partner of CalPERS, which publicly endorsed the pension fund's reasoning. This endorsement from a prominent industry participant underscores the legitimacy of concerns regarding hedge fund fee structures and their sustainability for institutional investors managing massive capital bases with fiduciary obligations to beneficiaries.
The CalPERS exit reflects broader tensions within the institutional investment community regarding alternative assets. While CalPERS completely exits hedge fund exposure, the California State Teachers' Retirement System (CalSTRS) is simultaneously expanding its hedge fund commitments, demonstrating that large pension funds are adopting divergent strategies toward the asset class based on their individual cost-benefit analyses and risk management philosophies.
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