The pension fund responds to challenges to its decision in 2014 to end its hedge fund program.
The California Public Employees’ Retirement System (Calpers) is staying the course despite recent criticisms about its decision in September 2014 to end its hedge fund program.
Calpers manages the pensions of firefighters, police, teacher and other employees of the state of California, and has more than $300 billion in assets under management (AUM). Known for its innovative strategies, the fund’s actions are often regarded as a bellwether within the world of U.S. pension funds.
The hedge funds criticisms came to light in a Fortune magazine piece, dated Jan. 13, in which the author asserts that the pension fund’s liquidation of “around $3.377 billion in hedge fund assets” may have been a mistake because of the returns it might have realized in fiscal 2015.
In addition, the article suggests that that Calpers “seemed to change its rhetoric” recently via its results for fiscal year 2015, which ended on June 30, 2015. The results were announced earlier this month.
In 2014, Calpers officials argued that stepping away from hedge funds was not about their performance but about its perceived need to scale up its exposure to hedge funds to maximize benefits for its members.
Yet the Fortune piece suggests that performance is now part of Calpers’ reasoning for the retreat. As evidence, the story cites comments from Ted Eliopoulos, chief investment officer for Calpers, who states in the annual report that Calpers saved $217 million because it stepped away from hedge funds.
Furthermore, the author of the article argues that “Eliopoulos is looking at the savings in a vacuum. … What Calpers really needs to do is figure out how much money it would have made by maintaining its hedge fund portfolio, and then measure that against the fee savings.”
The writer also suggests that if Calpers had continued to use hedge funds it might have “generated around $243 million in extra hedge fund returns.” Once investment management and performance fees of approximately $67 million are subtracted, the pension fund “would have generated around $176 million more for its pensioners by maintaining its hedge fund portfolio than by liquidating it. At least on a one-year basis,” according to the story.
The writer acknowledges that its estimates are speculative but concludes that Calpers “crowing about savings in the absence of net return data is disingenuous, and particularly troubling given how its headline decisions are followed by other, smaller public pensions.”
In response, Calpers issued a statement, “Hedge Fund Decision Not About One Year Performance,” on Jan. 15, presumably in response to concerns raised about its hedge fund decision.
“Calpers decided to end its hedge fund program, Absolute Return Strategies (ARS), in September of 2014. The matter was widely covered in the media and drew considerable attention at the time,” according to the statement. “As we indicated very clearly at that time, program performance was not a key driver of the decision. In fact, ARS historical performance, whether good or bad, didn’t move the performance needle at the total fund level in any meaningful way.”
The statement stresses that the pension fund decided to shut down ARS “primarily due to the program’s cost, complexity, and risk. It also was a matter of scale, as increasing the size of the program in a manner that would make it effective for a fund of our size was not feasible,” according to Calpers.
“We stand by our decision, and the reasons we eliminated the program remain extant today. Any comparison of one year of hypothetical performance of the program, to the actual ongoing fee savings is not only speculative but also seems to compare apples and oranges, so to speak. Fee savings are a benefit Calpers gets to enjoy going forward, regardless of the performance of our assets,” according to the statement.
“Calpers is a long-term investor; we invest with a 30- to 50-year horizon. We find that any one-year performance figure, in any asset class, is not a meaningful measure of the overall health of our fund,” according to the statement.
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