The largest U.S. public pension plan is getting out of hedge
funds as part of an effort to simplify its assets and reduce
costs.
The California Public Employees' Retirement System said Monday
it would shed its entire $4 billion investment in hedge funds over
the next year.
The pension plan, known by its abbreviation Calpers, which
manages investments and benefits for 1.6 million current and
retired police officers, firefighters and other public employees,
is a bellwether for investment trends at other public plans. Any
shift it makes will likely influence others because of its size and
history as an early adopter of alternatives to stocks and
bonds.
Many public pension plans have been discussing how much risk to
take in their portfolios as they face billions in unfunded
obligations to workers.
"Hedge funds are certainly a viable strategy for some," said Ted
Eliopoulos, interim chief investment officer at Calpers, in a
statement. For Calpers, the program "doesn't merit a continued
role" because of how complex and costly the funds can be, he
said.
The exodus from hedge funds at Calpers follows a review of the
portfolio that began in March, following the death of former chief
investment officer Joseph Dear. Calpers officials began raising
questions about whether hedge funds are too complicated or can
effectively balance out poor-performing equities during a market
crash, said people familiar with the situation.
Mr. Eliopoulos and his staff ultimately made the decision to
pull out from a total of 24 hedge funds and six "funds of funds"
that invest in a collection of hedge funds. The move was presented
to Calpers' investment committee on Monday. The committee supported
the recommendation. Existing staff who oversee the hedge-fund
investments will be reassigned, Calpers said Monday.
The Wall Street Journal reported last month that Calpers was
considering whether to retreat broadly from riskier assets,
including hedge funds. Bloomberg News earlier Monday reported
Calpers' decision to exit hedge funds.
Other pensions are also debating whether to avoid hedge funds
altogether. Last week, the San Francisco City & County
Employees Retirement System delayed for another 90 days a decision
on whether to allocate 15% of its money to hedge funds. It is the
second such delay this year.
The reconsideration of hedge funds as an investment option
hasn't yet produced shifts inside all funds. Some public pensions
say they are holding firm on their commitments or increasing their
allocations as they worry about how stocks will perform in a future
downturn. About half of the U.S. public pensions still have some
sort of hedge fund investment, according to data tracker
Preqin.
But hedge-fund allocations began dropping in the years following
a 2011 peak, according to data compiled by the Wilshire Trust
Universe Comparison Service, while the average amount committed to
private equity, by comparison, is still climbing. Stocks and bonds
are still the dominant investments for all public pensions.
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