SACRAMENTO, Calif. - CalPERS trustees are to vote May 14 on the proposed selection of Blackstone Alternative Asset Management as strategic adviser for the fund's $1 billion initial allocation to hedge funds.
The move is being closely watched by pension funds and hedge-fund managers.
The proposed hiring would be a coup for Blackstone, which has $2.2 billion in assets under management in six fund-of-funds strategies and already manages $475 million in private equity for CalPERS. The relationship with the $152 billion California Public Employees' Retirement System, however, is strictly advisory.
Blackstone officials declined to comment in advance of the CalPERS meeting.
Mark Anson, CalPERS' senior investment officer, global equity, who oversees the giant fund's push into hedge funds, said the program, if approved, would funnel up to $1 billion initially into hedge funds that invest in global equities. He thinks CalPERS will fund between 10 and 15 managers in amounts of $50 million to $100 million each over the next 12 to 18 months.
Many top-flight hedge fund managers have closed themselves to new business, plus most have fairly small asset bases by institutional standards. Asked if he thought there are enough top-quality hedge fund firms that can handle allocations of that size, Mr. Anson replied: "That's the $1 billion question." He noted CalPERS would not be bound to allocate the full $1 billion if capable managers could not be found.
However, Mr. Anson is optimistic, saying, "$1 billion is large enough to get the market's attention but small enough so I think the hedge fund world can absorb it."
If the $1 billion is invested successfully, the staff could return to the board for increased allocations, he added.
Daniel M. Szente, CalPERS' chief investment officer, previously has said he could see hedge-fund allocations going to between $3 billion and $5 billion if the program is successful (Pensions & Investments, Jan. 8).
How CalPERS picks managers will be of intense interest to the hedge fund world. A series of papers written by Mr. Anson provides some insight.
Mr. Anson noted that hedge funds have provided positive returns and solid diversification benefits, and that the addition of hedge funds to a traditional portfolio of stocks and bonds can either reduce portfolio volatility while providing the same return, or increase return while keeping volatility steady.
But there are several caveats, he noted in a paper to be published in the Summer 2001 issue of the Journal of Investing. Most research on hedge funds has been conducted in a short time frame, from the early to mid-1990s. That's before Long Term Capital Management's near disaster, which reverberated throughout the industry. Also, survivorship bias, self-selection bias and catastrophe bias exist in studies. Other studies have estimated these three forms of bias could add 1.9 to 4.51 percentage points to estimated hedge fund total returns.
Also, it remains unknown whether skill-based hedge fund managers can deliver superior performance over time, he noted.
Mr. Anson wrote that institutions might consider three types of hedge fund strategies:
* Opportunistic strategies such as long-short portfolios offer above-market returns through superior skill or knowledge in a narrow market or strategy. CalPERS officials have identified as potential investment hybrid funds, which bridge the gap between private equity and index funds, as well as crossover funds, where private equity managers must use their knowledge in specific areas of the securities markets.
* Portable alpha strategies, where a diversified portfolio of hedge funds reduces the risk of investing with one manager. This could generate returns uncorrelated with traditional asset classes.
* Joint ventures with emerging hedge fund managers offer pension funds the prospect of reduced fees and a potential equity stake. The strategy combines private equity and hedge fund investing.
Mr. Anson said CalPERS is most likely to pursue opportunistic strategies first. The next logical step, he said, would be to move into portable alpha strategies. Further down the road, CalPERS could set up some joint ventures with emerging managers. (Blackstone runs $60 million in an incubator fund-of-funds strategy for emerging hedge fund managers.)
Alan Kaufman, chairman of AssetSight Inc., Princeton, N.J., and developer of an alternatives-based investible index, said CalPERS will invest "probably in things like market-neutral or relative value plays, which have a distinct pattern of returns compared to a typical long-only portfolio."