America’s largest pension fund is saying goodbye to hedge funds.
The decision by the California Public Employees’ Retirement System (CalPERS) to exit all hedge funds within the next year is making waves on Wall Street, where hedge fund assets are at record levels even as their returns have suffered.
That’s because CalPERS, which manages roughly $300 billion on behalf of 1.6 million government employees and retirees, holds considerable clout in the investment community. When you’re that big, people listen, and CalPERS has a history of activism. It’s known to take large stakes in publicly traded companies and then aggressively push for corporate change.
In a press release, CalPERS indicated that it’s choosing to dump its approximately $4 billion in hedge fund investments because they’ve become too complex and costly to manage. CalPERS said it paid $135 million in hedge fund fees in the fiscal year that ended June 30th alone.
Hedge funds don’t come cheap. While fees vary, most of these so-called alternative funds go by the “2 and 20” rule, whereby they take fees equal to 2% of assets under management as well as 20% of any profits they make. In regular business terms, that’s a fee for service plus a performance fee.
Meanwhile, hedge fund performance has lagged. CalPERS said its hedge funds returned just 7.1% in the latest fiscal year. According to the Barclay Hedge Fund Index, hedge funds overall returned only 11% in 2013, while the S&P 500 gained 30%. They’re up 4.5% so far this year, compared to the S&P 500’s 8% advance.
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