CalPERS Didn’t Exit Hedge Funds
Thousands and thousands of words have been written about CalPERS’ decision to exit hedge funds. Reporters and commentators have questioned whether this is the beginning of a trend or merely an isolated decision. For example, Gretchen Morgenson wrote a column last week entitled “Slamming a Door on Hedge Funds” based on the implications of a CalPERS’ eliminating hedge funds from their roster of assets. The Wall Street Journal led with “Calpers to Exit Hedge Funds.” Every bit of this analysis is based on a false premise. Only David Ranii of the News & Observer asked CalPERS the relevant question: are you exiting all of your hedge fund exposure? Mr. Ranii’s article focuses on North Carolina’s intention to continue investing using hedge funds. Along the way Mr. Ranii unearthed the real story at CalPERS. Here’s what Mr. Ranii reported:
Although CalPERS appeared to be saying it was ending all hedge fund investments, spokesman Joe DeAnda confirmed that it actually is eliminating a specific hedge fund investment program, which it calls its Absolute Return Strategies program. ARS programs typically involve diversified investments aimed at lowering risk while still generating good returns.
“The decision only impacts our ARS program,” DeAnda said in an email.
“ ‘Hedge’ strategies in other asset classes are not affected.”
In other words, CalPERS is shutting down a specific program but will continue to employ hedge funds in other areas. Absolute Return Strategies are a cocktail of different hedge fund strategies designed to produce consistent investment returns with low year-to-year volatility. CalPERS has merely concluded that this specific program doesn’t work. In my role as CIO for North Carolina, I set up this type of program in 2002. As I’ve written before, this experiment did not produce either the returns or reduction of risk I expected. As Mr. Ranii reports, North Carolina has been winding down its absolute return program since 2009. Rather than being in the vanguard as press reports indicated, CalPERS is following North Carolina, Pennsylvania State Employees Retirement System, and other pension plans in questioning absolute return strategies.
Unfortunately, we’ve made little progress in addressing the high fees, hidden exposures, dearth of adequate benchmarks, and lack of transparency represented by hedge funds. CalPERS’ investment program and those of most other public funds are going to continue hiring hedge funds, and the industry’s share of assets will continue to grow. It turns out that nothing has changed.