Orange County Employees Retirement System, Santa Ana, Calif., is considering replacing or reorganizing its $1.6 billion absolute-return strategies because the portfolio is too costly and has not produced sufficient diversification or return, according to a report.
The report was made for OCERS’ Wednesday investment committee meeting by Pension Consulting Alliance, strategic portfolio and risk adviser for the pension fund.
If the $782 million hedge fund portfolio had been allocated to the Barclays Capital U.S. Universal index, it would have been one-third of the cost for similar results, the report said. Over the five years ended June 30, OCERS’ hedge fund portfolio earned an annualized return of 3.5% compared to the Barclay’s U.S. Universal index’s 4% return. In 2015 alone, OCERS’ hedge fund portfolio cost $17.5 million compared to $13 million for OCERS’ $4.6 billion equity portfolio — $2.1 billion in domestic equities, $1.2 billion in international equities, $758 million in emerging markets and $543 million in global equities. The Barclays Universal index would have been 1.3% of the cost for a similar result.
The strategies are complex and expensive, with some locked up until 2018, the report noted.
“You are not getting what you are paying for,” PCA said in its report. “If you are not going to fix it, nix it.”
PCA’s report said the $12.7 billion pension fund’s absolute-return portfolio could be structured at a lower cost, with higher transparency and lower complexity, but did not provide details.
OCERS’ general investment consultant, Meketa Investment Group, is expected to present a template for revising the pension fund’s asset allocation that would impact the absolute-return portfolio at the investment committee meeting Wednesday. At the same time, Girard Miller, chief investment officer, is asking the committee direct him to work with OCERS consultants to create a plan to reduce the cost and number of hedge funds in OCERS portfolio, with remaining-manager oversight by Meketa to commence in 2017, according to a memo by Mr. Miller.
The other part of OCERS’ absolute-return portfolio are global tactical asset allocation managers Standard Life Investments, with $291.4 million; Bridgewater Associates, $247.9 million; and Grantham, Mayo, Van Otterloo & Co., $237.6 million; and
Tactical trading hedge fund managers are Alphadyne Asset Management, $70.2 million; and Pharo Management, $62.7 million.
Multistrategy hedge fund managers are D.E. Shaw Group, $76.8 million; Och-Ziff Capital Management Group, $57.1 million; and Highfields Capital Management, $56 million.
Long/short equity hedge fund managers are Gotham Asset Management, $53.6 million; and BlueMountain Capital Management, $49 million.
Event-driven hedge fund managers are Venor Capital Management, $51.7 million; Archer Capital Management, $48.6 million; Ionic Capital Management, $36.1 million; and Perry Capital, $21.1 million.
Relative-value hedge fund managers are Garda Capital Partners, $62 million; Pacific Investment Management Co., $52.9 million; Caspian Capital, $43.9 million; and Fore Research & Management, $40.5 million.