Friday, September 19, 2014

Standing Up to Alternatives in California

Standing Up to Alternatives in California

Much is being written about CalPERS’ decision to eliminate its exposure to hedge funds.  As I wrote earlier in the week, CalPERS’s exposure of $4 billion isn’t large relatively small at only 1.5%.  In my view it’s the city and county retirement systems in California that are making more significant news.

Yesterday, the San Diego County Employees’ Retirement Association scheduled a vote to terminate its relationship with Salient Partners, its outsourced CIO.[1]  I wrote extensively about the growing role of Salient in both overseeing and managing the assets of San Diego County (see, “Moving Around the Pieces: San Diego County Rejiggers Its Asset Allocation [August 18-19, 2014]”).  While there may be merit in having an outsourced CIO, I believe it is inappropriate for that CIO to also manage money for the same client. The appropriate checks and balances are missing. Moreover, San Diego County’s fees are rising, as more of the pension is committed to a variety of alternative strategies.  It’s heartening to see the trustees question the unprecedented power granted to Salient.

Last week, San Francisco City & County Employees’ Retirement System voted to delay a decision on moving a portion of their assets into hedge funds.[2]    In May I dissected, the presentation to San Francisco’s board of trustees (“Creating a Muddle:  San Francisco Contemplates Hedge Funds [May 24, 2014]”), which was filled with self-serving platitudes.  Despite preparing a detailed report, San Francisco’s CIO is still facing pointed questions.  Again, I salute the trustees.

The proponents of alternative strategies have made a variety of promises to public pension plans.  They’ve promised superior performance, enhanced risk management, and superior oversight.  I hope trustees at pension plans across the country will draw inspiration from San Diego County and San Francisco and begin asking tough questions.


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