CalPERS to switch its hedge fund investments into managed accounts

The California Public Employees’ Retirement System (CalPERS) says it intends to alter the way it pays hedge fund managers for performance and switch hedge fund investments into managed accounts, since it believes the combination offers better alignment of interests, more control of assets and enhanced transparency.

“We believe that investors and managers alike stand to benefit over the long term when interests are better aligned, asset controls are properly instituted, and transparency of risks and exposures is improved,” said Joseph Dear, CalPERS Chief Investment Officer. “We look forward to working with hedge fund managers in the coming months to strengthen these concepts and make hedge funds an even more effective asset management tool in the CalPERS portfolio.”

In recent years, institutional investors have displaced wealthy individuals as the main clients of hedge funds. However, the hedge fund marketplace has not evolved sufficiently to accommodate what institutional investors require to maximize long-term benefits for their beneficiaries. Instead of commingled accounts, CalPERS intends to move toward a focus on customized vehicles, managed accounts and other methods to improve control of its assets.

CalPERS will also seek the highest and most timely disclosure of information possible from funds in its $5.9 billion Risk Managed Absolute Returns Strategies (RMARS) Program, to better assess, measure and manage the risks within its portfolio.

The pension fund also says fees should be based on long-term rather than short-term performance. The present model provides the possibility of a hedge fund manager realizing a 20 percent performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of the two years, but the investor may break even or even lose money.

CalPERS adds that it now believes performance fees should be based on long-term performance, and that mechanisms such as delayed realizations and clawbacks can better align the long-term interests of managers and investors. Management fees, says CalPERS, should better reflect the cost associated with generating performance and not be an invitation for asset-gathering.

“Hedge fund managers are expected to exhibit the same sound approach to business management they expect from the companies in which they invest,” said Kurt Silberstein, Senior Portfolio Manager, CalPERS Global Equity. “This restructuring effort is about building more stable, long-term relationships that also benefit hedge fund managers. It’s in our interest to get the best possible return on investment for our members, but it’s in the managers’ interest to be more closely aligned with CalPERS in building stronger, more stable relationships.”

CalPERS is the largest public pension fund in the United States, with approximately $173 billion in market assets. It provides retirement benefits to more than 1.6 million State, school, and local public employees, retirees and their families, and health benefits to nearly 1.3 million members.

Tags: Hedge FundsCalPERS