CalPERS officials made ineffective portfolio construction choices for a dozen years before throwing in the towel on hedge funds, sources say.
At the same time, the program was too small — a mere $4 billion — to have any meaningful effect on overall returns, Theodore “Ted” Eliopoulos, the new chief investment officer of the $298 billion California Public Employees' Retirement System, Sacramento, said in a Sept. 25 interview.
Mr. Eliopoulos secured trustee support at a Sept. 15 investment committee meeting for the staff's decision to wind down the portfolio within a year and redeploy the assets and the internal investment personnel to other asset classes. The pension fund currently invests directly in 24 hedge funds and six hedge funds of funds.
To make the investment meaningful, Mr. Eliopoulos said in the interview, CalPERS would need to invest at least $30 billion, which was seen as too risky and too expensive. He said just running a $4 billion program cost CalPERS $135 million in fees a year.
Industry observers agree that scale was an issue, but only one of several. “I think they had a constantly muddled approach,” said a source who spoke on condition of anonymity.
Sources said the portfolio suffered from:
- direct investments in “a lot of third-tier firms” and inappropriate sizing of the mandates;
- too much money invested through “obscure” hedge funds-of-funds managers;
- too big a weighting to emerging and women-, minority- and disabled veteran-owned hedge fund firms; with mandates that were too large; and
- an expensive additional layer of fees paid for consulting advice to hedge funds-of-funds managers A&Q Hedge Fund Solutions (UBS) and Pacific Alternative Asset Management Co., that also manage part of the CalPERS portfolio.
CalPERS is the first large institutional investor to completely shut down its hedge fund program, sources said, a decision that didn't surprise them and one they don't expect to spark an institutional investor exodus from hedge funds and hedge funds of funds.
That's because CalPERS has long been an outlier, the one big investor that observers said simply couldn't create a viable hedge fund investment program.
“We considered the fact that it is an expensive program to run ... and it's a complex program to run,” Mr. Eliopoulos said. “And because of the cost and the complexity of the program, we were not comfortable at the end of the day scaling up the program to a size that would have a meaningful impact,” he said.
Mr. Eliopoulos and his staff first gave a glimmer of their assurance about hedge fund-free investing to the outside world in February.