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CalPERS's Hedge Fund Divestment Not So Far Part Of Broader Trend - Industry

Tom Burroughes

19 September 2014

The decision by the $398 billion California Public Employees' Retirement System's (CalPERS) to abandon investing in hedge funds over cost and return complaints is unlikely to herald a sea-change in the industry, people in the sector say.

The decision by the pension fund to divest its entire $4 billion exposure to the sector created media headlines because its investment decisions are often treated as a bellwether for how large institutions view certain asset classes. It suggests some general dissatisfaction the $2.8 trillion hedge fund sector, according to Osterweis Capital Management, a US-based firm.

“Hedge funds have largely disappointed and have become institutionally-oriented absolute return strategies. They actually managed to lose a fair amount of money in 2008 - less than the stock market but still a lot of money in absolute terms,” it said in a recent equity outlook paper, published in July.

According to Chicago-based Hedge Fund Research, there have been a total of $57 billion; of the total of $2.8 trillion of global hedge fund assets, 43 per cent of that is institutional. As far as returns are concerned, the HFRI Fund Weighted Composite Index rose 1.6 per cent in August, the strongest month since February, with gains across all strategies, led by a rise in macro & commodity trading advisor strategies. Over the year to date so far, the MSCI World Index of developed countries’ shares shows total returns (capital plus reinvested dividends) of 6.6 per cent, beating the HFRI Fund Weighted Composite Index for the same period at 4.1 per cent.

“I think the decision is leading them in a different direction to the rest of the industry in terms of how allocations are going,” Ken Heinz, president at HFR, told this publication in a phone call. CalPERS has specific return and cost requirements that fit with its status as a large pension fund so its decision is not necessarily particularly significant. The organisation has the financial buying power to be strong in negotiating on fees. Even if it no longer invests in custom-built hedge fund vehicles that doesn’t mean it will completely abandon hedge fund strategies, he said.

In fact, far from it being the case that institutions are reducing hedge fund exposures, more are trying to cut conventional exposures to equities and they want more diversified exposures, he said. “More pension funds are looking to reduce their equity market Beta,” Heinz said.

eVestment, a firm operating in the alternatives investment space, said its August asset flows report showed interest in increasing hedge fund exposures continues. Investors added an estimated $12.6 billion in August, it said; the eVestment figure for total AuM is larger than the HFR figure, at $3.068 trillion.