The Alaska Retirement Management Board is weighing in on Calipers decision to exit hedge funds, saying CalPERS is close to being a “perfect contrary indicator.”

When the California Public Employees’ Retirement System (CalPERS) loudly exited their hedge fund positions, voices from both sides of the issue chimed in.

CalPERS decision was not significant enough to move the performance needle

On one hand, hedge fund critics looked at the under-performance of the hedge funds relative to their high fees and wondered why not just invest in a stock index fund ETF? Hedge fund defenders said that the point of a hedge fund was to hedge risk during periods of market uncertainty, which was approaching as quantitative easing was being pulled from the system. Still others noted that CalPERS allocation was not significant enough to move the performance needle and the cost of scaling an alternative investment infrastructure inside the retirement system was simply too expensive to warrant the investment. Others said in whispers they selected hedge funds highly correlated to the performance of the stock market without much chance of outperforming the major stock benchmarks.

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Enter Dr. Jerrold Mitchell, a Partner of Saltonstall & Co., LLP, a former chief investment officer at the Boston Foundation and the Massachusetts Pension Reserves Investment Trust, who serves on the Alaska Retirement Board’s Investment Advisory Council.

As the U.S. Federal Reserve is said to be preparing for market volatility, according to a recent Royal Bank of Scotland report, and market prognosticators have noted the potential for a market environment switch from smooth sailing, made possible by quantitative easing, to choppy seas ahead as QE is withdrawn, Mitchell says now is not the time to leave true hedge funds.

CalPERS is close to being a perfect contrary indicator

“CalPERS is close to being a perfect contrary indicator, meaning as long as decisions are opposite CalPERS decisions, all will be just fine,” he was quoted as saying in a report for Alaska Retirement Management Board of Trustees meeting, first reported in Bloomberg Briefs.

But Mitchell didn’t just stop there. Not only should they keep alternative allocations steady, ignoring CalPERS lead, but “it may be appropriate to increase the absolute return investments, since the time to hedge is when everything is going well and asset prices are high.”

Many quantitative investment professionals consider the length and consistency of the stock market run-up in a stimulative environment and note that, if markets are allowed to operate freely, they often revert back to the mean. For his part, Mitchell is already there. “There have been six consecutive years of gratifying stock market returns,” he was quoted as saying, indicating that now, with valuations near all time highs and quantitative easing being withdrawn from the U.S. market environment, now might not be the best time to go all in long stock market investments.

Is Mitchell making a prediction on the future? Not likely. Rather, he is probably looking at probability itself and noting that at some point we might see a serious pullback, which could be a natural market occurrence.

“Dr. Mitchell believes neither governments nor private economists can forecast the economy at turning points with accuracy or consistency,” the Alaska Retirement Board report noted. “That does not mean we should give up trying, but when economic forecasts are expressed from managers, actuaries, consultants, or members of the IAC, we should realized just how fallible those forecasts have been.”

Like the boy who cried wolf, the “investment world has been consumed by discussion of risk ever since 2009,” Mitchell was quoted as saying, noting he believes the simplest and best approach to risk is to be long-term, and long term risk could be on the horizon. “Steady investing leads to steady results and is also beneficial from a physiological point of view of lower levels of cortisol.”