CalPERS Cutting Hedge Fund Investments To Reduce Costs

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The California Public Employees’ Retirement System announced on Monday, September 15th that it plans to phase out its hedge fund investment operations, called the Absolute Return Strategies (ARS) program. CalPERS decision to end the hedge fund investment program relates to an ongoing effort to reduce complexity and costs in its investment operations.

The decision stemmed from a staff recommendation, and was supported by the Investment Committee. It will lead to selling off investments in 24 hedge funds and six hedge fund-of-funds with around a $4 billion valuation.

According to the statement released today, CalPERS is the largest public pension fund in the U.S. and manages close to $300 billion in assets. The CalPERS retirement system has more than 1.6 million members, and more than 1.3 million participate in the organization’s health plans.

Statement from CalPERS Chief Investment Officer

“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” explained Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “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 program is no longer warranted.”

Eliopoulos also mentioned that nearly all of the existing ARS staff will be reassigned within the CalPERS Investment Office.

“The staff dedicated to our program have worked diligently and we will ensure that their talent can continue to help CalPERS meet its investment objectives,” he said.

Details on the CalPERS hedge fund program wind down

Analysts say the hedge fund program wind down related to a new a set of Investment Beliefs adopted by the CalPERS board designed to underpin strategic decision making. Investment Belief 7 states that “CalPERS will take risk only where we have a strong belief we will be rewarded for it.” Investment Belief 8 notes that “Costs matter and need to be effectively managed.”

“The Investment Beliefs exist to provide a compass for the System’s work to achieve its strategic goals,” explained Henry Jones, CalPERS Board Member and Chair of the Investment Committee. “While the ARS analysis was no simple matter for CalPERS, the Investment Beliefs provide guidance for a straightforward and principled conclusion that fits our needs.”

The statement also noted that CalPERS will spend the next 12 months or so strategically exiting current investments in the best interests of the portfolio.

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