The California Public Employees’ Retirement System plans to divest the entire $4 billion that it invested with hedge funds, saying they’re too expensive and complex.
The decision to eliminate 24 hedge funds and six hedge fund-of-funds, isn’t related to the performance of the program, interim Chief Investment Officer Ted Eliopoulos said yesterday. The board of the $298 billion pension, known as Calpers, hasn’t decided where to invest the money after the pullout, which will take about a year, he said.
“We concluded that we would eliminate the hedge fund program in order to reduce the complexity, reduce the costs in the program, particularly in relation to our view that given the scale of Calpers, we would not be able to scale a hedge fund program to a size that would really move the needle,” Eliopoulos said in an interview.
The largest U.S. pension is getting out of hedge funds even as other large public plans such as New Jersey’s add to the private portfolios. Calpers has been working to reduce risk after the global financial crisis wiped out more than a third of its wealth, forcing it to increase contributions from taxpayers to cover losses. Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.
The pension fund paid $135 million in fees in the fiscal year that ended June 30 for hedge fund investments that earned 7.1 percent, contributing 0.4 percent to its total return, according to Calpers figures.
“One of our fundamental investment principles is that cost matters,” Eliopoulos said, “It is an expensive investment vehicle, especially at our scale.”
Because of its size, Calpers is often a trend setter among pension funds on investment strategies, said Keith Brainard, research director of the National Association of State Retirement Administrators.
“I would expect their decision to divest from hedge funds will cause some public pension funds to re-evaluate their hedge fund strategy, although many public pension funds consider hedge funds to be a vital part of their diversified portfolios,” Brainard said yesterday by e-mail.
Calpers earned 18.4 percent in the fiscal year as global stock indexes rose to records. The fund’s market value reached $300 billion for the first time July 3, making it bigger than all but two companies on the Dow Jones Industrial Average.