CalPERS Eliminates Hedge Fund Program in Effort to Reduce Complexity and Costs in Investment Portfolio

The staff recommendation, supported by the Investment Committee, will exit 24 hedge funds and six hedge fund-of-funds valued at approximately $4 billion.

“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted.”

Decision not based on performance of program

Following the 2008 global financial crisis, CalPERS began examining ways to ensure it was less susceptible to future large drawdowns. The System restructured its investment operations, improved its internal oversight and control functions, and refocused some of its investment programs. In February 2014, the CalPERS Board adopted a new asset allocation mix that reduces risk to the portfolio, while still being able to achieve its return goal of 7.5 percent. CalPERS earned 18.4 percent during the 2013-14 Fiscal Year and has averaged a 12.5 percent return for the past five years and an 8.4 percent return for the past 20 years.

In September 2013, the CalPERS Board adopted a set of Investment Beliefs to inform the strategic decision making of the System. Investment Belief 7 states that “CalPERS will take risk only where we have a strong belief we will be rewarded for it.” Investment Belief 8 notes that “Costs matter and need to be effectively managed.”

“The Investment Beliefs exist to provide a compass for the System’s work to achieve its strategic goals,” said Henry Jones, CalPERS Board Member and Chair of the Investment Committee. “While the ARS analysis was no simple matter for CalPERS, the Investment Beliefs provide guidance for a straightforward and principled conclusion that fits our needs.”

CalPERS will spend approximately the next year strategically exiting current investments in a manner that best serves the interests of the portfolio. Existing ARS staff will be reassigned within the Investment Office.

“The staff dedicated to our program have worked diligently and we will ensure that their talent can continue to help CalPERS meet its investment objectives,” said Eliopoulos.

CalPERS is the largest public pension fund in the U.S., with approximately $300 billion in assets. CalPERS administers health and retirement benefits on behalf of 3,090 public school, local agency, and state employers. There are more than 1.6 million members in the CalPERS retirement system and more than 1.3 million in its health plans.