“The amazing returns of a select few basically has had a huge negative impact as others tried to copy but were unable to do so,” said Thomas Gilbert, an assistant finance professor at the University of Washington’s Foster School of Business, who reviewed the union’s report before it was published.
Hedge funds, which bet on rising as well as falling securities prices, have been subject to growing scrutiny because of the high fees they charge for what in recent years has often been subpar performance. While dispersion among returns was sizable, the asset class on average lost 1 percent in 2015. It also trailed the Standard & Poor’s 500 Index for seven calendar years, according to data compiled by Hedge Fund Research Inc.
Reduce Exposure
American International Group Inc. said last month it would reallocate about 50 percent of an $11 billion hedge-fund portfolio as performance soured. The California Public Employees’ Retirement System in September 2014 said it would divest the entire $4 billion it had in the asset class, saying the strategies were too expensive and complex.
While 9 percent of endowment managers said they planned to add to their hedge fund allocation in the fiscal year beginning in July, 17 percent said they would lower their exposure to such strategies, according to a survey last month by the National Association of College and University Business Officers and the money manager Commonfund.
The California system also has $3.2 billion of hedge funds in its $53 billion pension and another $1 billion of exposure through its working capital. The pension fund is invested in the same hedge fund managers as the endowment and produced the same return last year, according to university documents.
Bachher said in the interview that the university is also reviewing the absolute return funds in the pension fund as well as the six managers overseeing the allocation in the working capital fund.
A concentration of managers could result in more risk to a portfolio, said Darren Myers, a Denver-based partner in the asset management group at Perella Weinberg Partners, which oversees $8.9 billion for institutions such as universities.
“An investor could expect higher returns by reducing the number of managers but at the cost of higher volatility,” Myers said.