RMA Panelists See CalPERS' Hedge Fund Exit As Isolated Event

At the RMA Conference on Securities Lending in Naples, Florida, panelists were optimistic about the growth potential for pensions to invest in hedge funds, adding that last month’s decision by CalPERS to wind down its hedge fund investments does not seem to be an indicator of what’s to come.

“Pensions are by far the biggest allocators to hedge funds right now. Pensions have $1.7 trillion in hedge fund money,” said Sandy Kaul, global head of Business Advisory Services at Citi. “We forecast that’s going to double to $3.5 trilion just in the next five years. And even at $3.5 trillion, we’re still not even looking at 8% of the pension pool. So pensions just have this tremendous amount of money, and as they start to shift some of it towards these hedge funds or these long/short strategies, it does create huge opportunity.”

When asked whether CalPERS’ decision is cause for concern in the industry, the panelists did not think it was an issue.

“When Kurt Silverstein (who oversaw CalPERS’ hedge fund investments) left (in 2011), they didn’t have anybody who understood hedge funds, and from the board minutes, it’s very clear that they said they got out of hedge funds because they didn’t have the competency to oversee an investment portfolio of hedge funds,” said Michael Litt, founding member, Arrowhawk Capital Partners. “That was an honest mistake that they made. It’s stunning that a pool of capital that large can’t see clear to have the expertise to invest in a diversifying asset that has a higher Sharpe ratio (which measures risk-adjusted performance), but that’s just the reality at CalPERS.”

Ted Eliopoulos, CalPERS interim chief investment officer, did note last month that complexity was a factor, saying, “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 (absolute return strategies) program is no longer warranted.”

However, Elopoulos also pointed out at a CalPERS’ board meeting in September that the decision reflects the pension fund’s investment beliefs.

“We were guided by our investment beliefs during this process, particularly investment belief number seven—CalPERS will take risk only where we have a strong belief we’ll be rewarded for it—and investment belief eight—costs matter and need to be effectively managed.”

Still, at RMA, Jon Kinderlerer, managing director at Credit Suisse, said that this decision is “specific to CalPERS. It doesn’t represent more than that, it doesn’t represent a reweighting of hedge funds in institutional portfolios.”