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 The $300 billion fund, known as Calpers, invests with firms
including Och-Ziff Capital Management, Deepak Narula's Metacapital
Management and Bain Capital's Brookside Capital and plans to pull
the money out over the next year. The fund will also exit from
fund-of-funds Pacific Alternative Asset Management Co and Rock Creek
Group.
Representatives for several of the affected funds did not
immediately respond to requests for comment.
Calpers has been investing in hedge funds for more than a decade,
having been one of the first big-name funds to put money into the
loosely regulated hedge fund industry in 2002. Thanks to its size,
its investments decisions have long been followed closely and some
industry experts said that other pension funds might now rethink
some of their allocations to the roughly $3 trillion hedge fund
industry.
"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 ... the ARS program doesn’t merit a
continued role," Ted Eliopoulos, Calpers' interim chief investment
officer, said in a statement.
Calpers said it will spend the next year pulling money out of 30
firms "in a manner that best serves the interests of the portfolio,"
he added. Hedge funds often lock up their investors' money for
months, if not years.
Discussions about hedge funds' role in the massive portfolio began
after Joseph Dear, Calpers' former chief investment officer, died of
cancer in February, people familiar with the fund said.
Dear, who joined Calpers in 2009, embraced riskier assets including
hedge funds and private equity funds, to help recover losses
suffered during the financial crisis when its investments lost 23.6
percent during the fiscal year that ended on June 30, 2009.
But in the last years, most hedge funds have not delivered the
out-sized returns the industry became famous for, prompting many
pension funds and other large institutional investors to question
hedge funds' fees which often include a 2 percent management fee and
20 percent of the gains achieved. Hedge funds returned 4.10 percent
this year through August, according to Hedge Fund Research, lagging
the Standard & Poor's 500 9.87 percent gain.
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"The hedge funds haven't contributed much to Calpers' results during
the stock market boom, but the right ones could provide a hedge
against a drop in the market," said Erik Gordon, who watches the
industry closely as professor of law and business at the University
of Michigan.
In July, Calpers said that its investments returned 18.4 percent
during the fiscal year that ended on June 30 with hedge funds
gaining 7.1 percent. Private equity investments returned 20 percent.
The fund's investment goal is 7.5 percent.
For the 10-year period ended on June 30, Calpers' investments earned
a 7.2 percent return.
Calpers offers benefits to roughly 1.6 million current and retired
police officers, fire fighters and other public employees.
Roughly half of all U.S. pension funds have made some allocation to
hedge funds. According to industry trackers, some funds are looking
for ways to cut costs. Massachusetts, which invests roughly $5.6
billion with hedge funds is pushing to move some of that money into
separately managed accounts and may even invest, at a lower cost, in
strategies designed to mimic hedge fund returns.
The fund's alternative asset program has had its ups and downs in
recent years. Former Calpers Chief Executive Officer Fred Buenrostro
pleaded guilty earlier this year to bribery and fraud in a federal
conspiracy case.
(Reporting by Svea Herbst-Bayliss in Boston and Barani Krishnan in
New York; Additional reporting by Tim Reid in Los Angeles; Editing
by Lisa Shumaker)
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