As institutional investment in hedge funds matures, most investors have been busy starting, growing, optimizing and fine-tuning their hedge fund portfolios.
A few institutions, however, have drastically cut or completely axed their investment in hedge funds.
Among the small cadre of investors that have decreased or dropped hedge fund investments are the $298.4 billion California Public Employees' Retirement System, Sacramento; the $18.3 billion Los Angeles Fire & Police Pension System; the $11.3 billion New Mexico Educational Retirement Board, Santa Fe; £1.6 billion ($2.7 billion) Oxfordshire County Council, Oxford, England; and the $1.3 billion Louisiana Firefighters' Retirement System, Baton Rouge.
While some of 2014's most attention-grabbing headlines, including Pensions & Investments' May 12 “CalPERS chopping hedge fund allocation” headline, have focused on the asset owners cutting back on hedge funds, industry sources said they aren't seeing a widespread move away from the asset class.
“We are not seeing a trend in that direction,” said Brian Kmetz, assistant vice president, hedge fund research, for investment consultant Callan Associates Inc., San Francisco.
In fact, most institutional investors, including public pension funds, endowments, foundations, insurers and sovereign wealth funds, have maintained or steadily increased their investments in hedge funds and hedge fund strategies.
Hedge fund search and hire activity, particularly by first-time hedge fund investors, has been strong so far this year, a review of Pensions & Investments' reporting showed.
Among recent first-time hedge fund investors and searchers:
- Illinois State Universities Retirement System, Champaign, will soon begin a search for either hedge fund or fund-of-funds managers for a new 5% allocation for the $16.9 billion defined benefit plan it oversees;
- The $5.1 billion City of Milwaukee Employes' Retirement System hired Allianz Global Investors to manage $62.5 million in an absolute-return strategy in July; and
- The $1.1 billion St. Paul (Minn.) Teachers' Retirement Fund Association hired EnTrust Capital Management LP to manage $55 million in a customized hedge fund-of-funds separate account in May.
Other institutional investors have spent the first part of 2014 pushing their portfolios farther down the hedge fund evolutionary path by adding diversifying niche strategies.
The $14.6 billion Illinois State Board of Investment, Chicago, seeks to diversify its $1.5 billion hedge funds-of-funds portfolio by moving as much as $150 million into a customized emerging hedge fund manager portfolio from existing hedge funds-of-funds managers.
Even as the majority of institutional asset owners stay on course with their hedge fund portfolio development, the fact that one of the longest-tenured and largest of institutional hedge fund investors — CalPERS — has been stealthily halving its $5 billion portfolio throughout 2014 (P&I, May 12) has made some institutional chief investment officers edgy, sources said.
A hedge fund consultant, who asked not to be identified, said CalPERS' decision to slash its hedge fund allocation “clearly is (raising) questions” among the consultant's large European pension fund clients.
CalPERS' investment executives have been focused on reducing hedge fund fees since at least 2009, when staff stated their intention to renegotiate the fees and terms of the contracts of hedge fund and hedge funds-of-funds managers in the portfolio, (P&I, April 20, 2009).
“Fees are always on the table,” said Mr. Kmetz, noting Callan has had success in bargaining down hedge fund fees for clients.
Mr. Kmetz maintained that hedge funds have been “performing up to our expectations” since the 2008 financial crisis, despite the “trumpeting of all the supposed virtues” of high hedge fund performance.
“Obviously, people have expected a lot more” from hedge funds in terms of returns, Mr. Kmetz said, but added that “with hedge funds, you have to manage expectations and focus on the diversification and hedging protection they offer portfolios.”
That said, a select few institutions have recently ended their experiment in hedge fund investing.