Pension Cuts Hedge Fund Investments

I was reading the Wall Street Journal over the weekend and saw that the California Public Employees Retirement System (Calpers) was cutting back their hedge fund exposure by 40 percent.

Given that hedge funds have generally struggled over the past five years, I was interested to see what the article said, and, basically, it said that they weren’t happy with the lackluster performance and high fees.

The article then said that they were cutting the exposure down to $3 billion and I realized that hedge funds must be a tiny part of their portfolio since Calpers is the largest pension fund in the US.

I went to the Calpers site and found that the fund has approximately $300 billion in assets, so the cut takes their allocation from 1.6 percent to one percent – that’s a lot less dramatic sounding than a 40 percent cut to the allocation!

As I looked at their website, I was struck by how different it looks than the large endowments that I have profiled in the past.  In fact, the Calpers portfolio looks fairly conventional, like one that we might have.

Of course, I can’t see all of the details and it would probably take a day or two of orientation to figure out what’s really going on, but their basic mix appears to be 65 percent stocks, 17 percent bonds, 11 percent ‘real’ assets, four percent cash, and the remainder in absolute return funds.

In a sense, the ‘real’ assets and absolute return funds are replacements for bonds, so they essentially have a 65/35 stock/bond mix.

The real assets are comprised of real estate and forestland.  We invest in real estate through Real Estate Investment Trusts (REITs), but since they trade daily and tend to be about as volatile as stocks, we include them in the ’65’ portion of the portfolio.

Large institutional investors like Calpers don’t buy REITs, they buy actual buildings; the rent acts like income and they get the benefit of increasing prices (usually with leverage) but don’t have to price the properties daily, so it doesn’t look so volatile.

The ‘hedge’ funds that the Wall Street Journal referred to are the small part of the absolute return funds.  The larger part is still made up of hedge funds that pursue strategies that aren’t related to stocks or bonds, like merger or convertible bond arbitrage.

Interestingly, of their equity portfolio, almost 80 percent of it is in publicly held stocks – just like what we own.  I expected to see more private equity since it tends to dominate the endowment portfolios like Harvard and Yale.

They listed their performance and while I didn’t do a true analysis on it, it looks pretty conventional, not radically different than what we might have done.  It’s a bit refreshing to see one of the ‘big boys’ doing largely the same thing that we are.

Of course, there are differences like REITs versus actual properties, they have different goals, time frames, balances, etc, but the fundamentals appear to be very similar to what we do at Acropolis.