By Johanna Bennett
Many public pension plans have been debating how much risk to have in their portfolios as they face billions in unfunded obligations to workers. TheCalifornia Public Employees’ Retirement System (CalPERS) has answered by dumping hedge funds from its portfolio.
In a press release issued Monday night, the nation’s largest public pension plan, with roughly $300 billion in assets, announced it will completely close its $4 billion hedge fund portfolio over the next year, and in doing so, pull out of 24 hedge funds and six “funds of funds” that invest in a collection of hedge funds.
It’s a big and dramatic move, and one that is bound to have a ripple effect give CalPERS’s size and role as a bellwether among public pension plans, as well as its history as an early adopter of alternatives to stocks and bonds.
“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,” said Ted Eliopoulos, interim chief investment officer at CalPERS in Monday’s statement.
The Wall Street Journal reported:
Public pensions began wading into hedge funds roughly a decade ago as they sought to boost long-term returns and close the gap between assets and future obligations to retirees. Hedge funds typically bet on and against stocks, bonds or other securities, often using borrowed money. Because of their relative complexity, hedge funds also charge higher fees than other money managers.
The move into hedge funds was part of a larger embrace of so-called alternative investments, including private equity and real estate, as pension officials hoped bigger investment gains would help them avoid extracting bigger contributions from employees or reducing benefits for current or future retirees. Many hedge funds dropped less than then overall market during the financial crisis.
According to the WSJ, the hedge fund program earned 7.1% during a fiscal year when all of CalPERS returned 18.4%. CalPERS expects to report that it paid out $135 million in hedge funds fees during the year ending June 30, 2014, up from $115 million the year before.
Other funds may follow suit. Last week, the San Francisco City & County Employees Retirement System delayed for a second time this year a decision on whether to allocate 15% of its money to hedge funds. Meanwhile, theCalifornia State Teachers’ Retirement System, will be evaluating its hedge-fund investments at the end of this year.