Did eleven words in a handwritten note from Warren Buffett spark a new trend for pension funds to reduce their hedge fund exposure?

warren buffett Hedge Fund

Blown up hedge funds seeking advice from Warren Buffett

When the San Francisco Employees Retirement System was considering allocating 15 percent of its assets towards hedge funds, a robust debate emerged. Board member Herb Meiberger, who argued hedge funds had blown up in the past and were not appropriate for government employee retirement funds, sought the advice of Warren Buffett, according to a report in the Wall Street Journal.

“I would not go with hedge funds – I would prefer index funds,” Warren Buffett responded in a handwritten note to Meiberger.

The argument comes as the California Public Employees’ Retirement System, commonly known as Calpers, is reducing its hedge fund exposure by 40 percent, according to the report, taking a more “back to basics” approach to investing.

The problem has been performance.

Hedge fund returns have been limping

As the stock market has been climbing to new heights, hedge fund returns have been limp. In the last seven years the Los Angeles Fire and Police Pensions have garnered a paltry two percent return from their hedge fund investments while the hedge funds soaked up 17 percent in fees. The fact the funds generated over eight times the return for themselves than they delivered to the pension fund is causing investment managers to question the nature of their hedge fund relationship.

“We were ready to move on,” Ray Ciranna, the LA fire and police pension fund general manager, was quoted as saying.

Some hedge funds have been accused of being strong vehicles to generate performance fees for their managers, but few else. However, hedge fund advocates would counter that the point of a hedge fund is to deliver durable performance – particularly during periods of financial crisis.

Hedge funds generally fared better than stocks during the 2008 market crisis – with managed futures performing the best – performance since then has been spotty. Activist investors have performed well, but stock pickers and many value managers have had difficulty in a market environment critics say is driven by artificial stimulus.

Will the movement become a full blown trend?

“We are seeing a little moving away from hedge funds,” Verne Sedlack, CEO of Commonfund was quoted as saying. So far the shunning of hedge funds is “just on the margin” said the manager of investments for pensions, endowments and other non-profit groups.