FEG’s Bean: Here’s Why Hedge Funds And Giant Public Pensions Aren’t A Good Match

At the Fund Evaluation Group’s (FEG) annual investment forum on Tuesday, Head of Institutional Investments Nolan Bean questioned whether hedge funds were a good match for giant public pension funds.

Bean argued that the public nature (and corresponding transparency requirements) of giants like CalPERS isn’t attractive for many of the best hedge funds managers – which in turn makes it difficult for CalPERS to hire the best managers.

More of Bean’s comments, from ai-cio:

At FEG’s annual investment forum, Bean claimed that a $291 billon public fund like CalPERS has little chance of squeezing alpha from hedge funds. Plus, the number of managers necessary to justify a hedge fund allocation at a fund of CalPERS’ size can lead to a portfolio that’s over-correlated to equities, while disclosure requirements make it difficult to invest with the top managers.

“They’re subject to FOIA [Freedom of Information Act] requests,” Bean said. “Hedge funds don’t want to be subject to FOIA requests. The best hedge funds won’t take money from them.”

And having access to the best managers is especially important when it comes to hedge funds, which Bean argued have the highest performance dispersion of any other class of manager.

“The reward is greater when you get it right, but the pain is also greater when you get it wrong,” he said.

[…]

But just because CalPERS was right to dump its hedge funds doesn’t mean everyone should, he noted. With management fees dropping—the average is now 1.5%—investors are able to get a better deal than ever. For smaller, more private funds such as endowments and foundations, there is plenty to be gained, Bean said.

Photo  jjMustang_79 via Flickr CC License