The University of California's endowment, which manages $2 billion in hedge fund investments, plans to pull money from the worst-performing managers and redirect assets to top firms, the state system's chief investment officer said.
The number of hedge fund managers will be cut to about 10 from 32 as soon as June, the latest move in a revamp of the university's $95.7 billion in pension and endowment assets that began two years ago under CIO Jagdeep Singh Bachher.
The university hasn't determined whether it will also reduce its allocation to hedge funds in the endowment, which has $8.8 billion in assets, Mr. Bachher said Wednesday in an interview. The goal is to create “a simpler, leaner and cleaner portfolio” with better controls over management fees, he said.
“We care about returns,” Mr. Bachher said. “We care about risk. We care about cost, and we care about transparency.”
Mr. Bachher informed the board that oversees the investment office on Feb. 26 about the reduction of hedge fund managers. “You give more money to the people who are doing well for you as opposed to spreading it out,” Mr. Bachher said at the meeting, according to a video posted on the university's website.
Since Mr. Bachher took over, the California regents office has liquidated $10 billion of investments, including private equity and real estate funds — also redirecting that money to its best-performing outside managers.
Hedge funds have been among the worst-performing assets for the endowment. They posted a 3.5% loss in the first six months of fiscal year 2016 through Dec. 31, while the entire portfolio declined 2.5%, according to a report from the Feb. 26 meeting. Over a decade, hedge funds generated a 5.5% annual return vs. 6.4% for the portfolio. Private equity holdings, by contrast, gained 4.2% in six months and an annualized 11.7% over 10 years.
The largest allocation as of Dec. 31, 2014, was $147 million to BIWA Fund, according to the most recent data available. The fund is managed by CQS, a multistrategy manager. The next largest was $109 million in a total return fund from York Capital Management.
The California system also has $3.2 billion of hedge funds in its $53 billion pension fund and another $1 billion of exposure through its working capital. The pension fund is invested in the same hedge fund managers as the endowment and produced the same return last year, according to university documents.
Mr. Bachher said in the interview that the university is also reviewing the absolute-return funds in the pension fund as well as the six managers overseeing the allocation in the working capital fund.
