CalPERS | Pension360

Advisors, Fund Managers React To CalPERS’ Hedge Fund Pullout

We’ve heard what CalPERS officials had to say about the decision to cut ties with hedge funds. But how are advisors and fund managers within the industry reacting to the news?

A few anonymous hedge fund advisors have claimed that CalPERS’ problem wasn’t hedge funds as an asset class—the problem was that the pension fund was bad at picking which hedge funds to invest in. From Business Insider:

“I think CalPERS is not a particularly good hedge fund investor,” one prominent hedge fund manager told Business Insider. He cited the pension fund’s lackluster annualized rate of return of 4.8% over the last ten years. “I would redeem too.”

He continued: “I think it’s not hedge funds as an asset class. It’s the ones they invest in.”

Another prominent hedge fund manager echoed that same sentiment.

“They got what they paid for since they only invested in managers who would cut fees. So the best funds wouldn’t do that, so they had a mediocre portfolio.”

Another investment officer gave a more measured response to the New York Times:

“I think the industry is changing. There is less tolerance for underperformance in an environment when you have a relative huge outperformance with more liquid opportunities like an S.&P.-500 index fund,” said Elizabeth R. Hilpman, chief investment officer at Barlow Partners.

“There is a lot of disappointment that hedge funds have not been able to capture more of the market results,” she added.

Several advisors gave some interesting opinions to Wealth Management, too:

“All taxable investors should take notice of this decision, because if Calpers doesn’t think the asset class is adding value for them, how does any taxable investor believe the asset class can add value in their portfolio—especially those in the top couple tax brackets?” said Scott Freund, president of Family Office Research.

[…]

“We already ignore the [hedge fund] genre because they are the Groucho Marx club of investing: The only ones that will let us in are the ones in which we don’t want to be invested,” said Stephen Barnes, investment manager and chief compliance officer of Barnes Investment Advisory. “Fees are too high. Truly a ‘heads I win, tails I don’t lose’ proposition for the hedge fund manager.”

Some advisors defended hedge funds in light of CalPERS’ decision. From Wealth Management:

Ryan Graves, wealth advisor with FirstPoint Financial, said alternatives play an important role in mitigating the risks associated with traditional asset classes.

“The time for a ‘true’ hedge fund (and not the levered up investment vehicles that many morphed into pre-2008) is when valuations are high, not after the correction has already occurred,” Graves said. “Just wait for a pullback in next 12-24 months and see how they try to explain away dumping an absolute return strategy.”

“To a contrarian this might mean it is time to consider investing in hedge funds,” said Kris Maksimovich, president of Global Wealth Advisors. “The decision could push hedge funds, especially the more expensive variety, to reconsider their pricing.”

There are plenty more quotes in the linked articles.

Photo credit: Lending Memo

CalPERS, LACERS Ramp Up Real Estate Commitments

CalPERS already made headlines today for deciding to pull $4 billion from hedge funds and hedge funds-of-funds.

But there was another bit of news that was less headline-worthy, but still important: CalPERS has decided to invest an additional $1.3 billion in real estate funds, according to a report from Pensions & Investments:

The $298 billion California Public Employees’ Retirement System, Sacramento, added $600 million to Institutional Logistics Partners, a real estate partnership with Bentall Kennedy. CalPERS first invested $250 million in Institutional Logistics Partners in March 2013. The strategy seeks to invest in core industrial properties.

Separately, CalPERS added a total of $700 million to two real estate partnerships with GI Partners.

The pension fund added $400 million to TechCore and $300 million to CalEast Solstice. TechCore invests in “technology advantaged” properties in the U.S., such as data centers, Internet gateways, corporate campuses for technology tenants and life-science properties in U.S. metropolitan areas, according to a news release from CalPERS. The pension fund first invested $500 million in TechCore in May 2012. The size of the CalEast Solstice portfolio could not be learned by press time.

LACERS, meanwhile, is committing $190 million to real estate funds over the next two years, according to a separate Pensions & Investments report:

Los Angeles City Employees’ Retirement System plans to commit $140 million to four new open-end core real estate funds this year and make $50 million in additional commitments in 2015, minutes from the pension fund’s Aug. 26 board meeting show.

Townsend Group, real estate consultant for the $14.4 billion pension fund, is recommending the pension fund this year commit about $35 million each to Clarion Partners’ Lion Industrial Trust, Jamestown Premier Property Fund,Morgan Stanley(MS) Real Estate’s Prime Property Fund, and Principal Real Estate Investors’ U.S. Property Account.

The recommendations will be presented to the board for approval at a later meeting. The recommendation is part of the pension fund’s decision in May to double its exposure to core real estate to a 60% target and decrease non-core investments to 40% from 70%. LACERS has an overall 5% allocation to real estate, with $739 million funded as of March 31.

Photo by thinkpanama via Flickr CC License

CalPERS To Ditch Hedge Funds Entirely

CalPERS has been reviewing its hedge fund strategy for months, and that review initially led to a 40 percent pullback from hedge funds.

But now the California pension fund has announced plans to cut the cord from hedge funds entirely, pulling out $4 billion from 30 hedge funds. From Reuters:

Calpers, the largest U.S. pension system, said on Monday it has scrapped its hedge fund program and will pull about $4 billion in its investments from 30 such funds.

The $300 billion California Public Employees’ Retirement System said it would exit the program, known internally at Calpers as the Absolute Return Strategies (ARS) program, to reduce “complexity and costs.”

“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 … the ARS program doesn’t merit a continued role,” Ted Eliopoulos, Calpers interim chief investment officer, said in a statement.

Calpers said it will spend the next year exiting 24 hedge funds and six hedge fund-of-funds, “in a manner that best serves the interests of the portfolio”.

The decision to exit the hedge fund program culminates a search, Calpers says, that began after the 2008 financial crisis to ensure it was “less susceptible to future large drawdowns.”

Calpers has signaled waning enthusiasm for the asset class for some time. It started a review of its hedge fund program this year and has said for months it would cuts its allocation to hedge funds.

CalPERS overall portfolio returned 18.4 percent last year. But it’s hedge fund portfolio earned only 7.1 percent, while racking up $135 million in fees and expenses.

Judge: San Bernardino Can Cut Firefighter Benefits

A judge ruled on Thursday that the bankrupt city of San Bernardino, California, could cut firefighter pension benefits as part of its bankruptcy plan.

The cuts would be in the form of higher pension contributions from firefighters and fewer hours of overtime. From Reuters:

In a tentative ruling, federal U.S. Bankruptcy Judge Meredith Jury said San Bernardino was entitled to unilaterally impose benefit cuts on the city’s firefighters, something their union had fiercely opposed.

Jury conceded that the cuts, which involve greater pension contributions by firefighters and reduction in overtime, were a hardship on the firefighters.

But she said the city had also been persuasive in showing that what it had been paying in terms of benefits to the firefighters was a financial burden, and being able to reject the firefighters’ collective bargaining agreement was a key step to forming a bankruptcy exit plan.

[…]

Last month the city reached an undisclosed deal with its police union. In June, it also reached a deal – subject to a judicial gag order – with its largest creditor, the California Public Employees’ Retirement System (Calpers).

The city only began face-to-face negotiations with some of its other large creditors – bondholders and insurers including Ambac Assurance Corp – last month.

The judge has made clear that it will not be before next year that she expects the city to produce a bankruptcy exit plan, known as a plan of adjustment.

San Bernardino filed for bankruptcy in 2012. It’s 2012 budget deficit was $45 million.

Court: CalPERS Can Sue Credit Rating Agencies Over Investment Losses

CalPERS lost over $10 billion during the financial crisis, and many of those losses stemmed from financial instruments given top-notch ratings by ratings agencies Moody’s and Standard & Poor’s.

CalPERS filed a lawsuit against the agencies for assigning ratings that misrepresented the quality of the failed investments, but the lawsuit had been held up for months as the agencies appealed the suit’s legitimacy in the lower courts.

But on Wednesday, the California Supreme Court ruled that CalPERS could indeed sue the agencies. From the San Francisco Chronicle:

The lawsuit involved its $1.3 billion investment in 2006 in three financial products – Cheyne Finance, Stanfield Victoria Funding and Sigma Finance – that had gotten the highest ratings from Moody’s and Standard & Poor’s. They were securities issued by banks and management companies and available only in private offerings to a limited number of institutional investors, including the pension system.

Only after all three went bankrupt in 2007 and 2008, CalPERS said, did investors learn that the products’ assets consisted largely of high-risk subprime mortgages. The suit also alleged that the rating agencies’ fee agreements had a built-in bias, entitling them to full fees only if they issued passing grades.

The ratings agencies had argued that their ratings were a form of free speech. The court agreed, but pointed out an important qualifier:

While investment ratings are a form of free expression, said the First District Court of Appeal in San Francisco, they are not mere expressions of opinion or predictions of success, which are immune from negligence suits. Instead, the court said, the ratings are factual assertions, issued “from a position of superior knowledge” about the investments’ financial health, and thus can be challenged if made falsely and carelessly.

And while federal law prohibits states from regulating credit-rating agencies, damage claims for misrepresentation are “within a field traditionally occupied by the states,” Justice Martin Jenkins said in the 3-0 appellate ruling.

Both ratings agencies appealed the decision Wednesday, but the court denied their appeals.

Audit Estimates Legal “Pension Spiking” by CalPERS Members Could Cost State $800 Million

The California Controller released an audit on Tuesday that found a particular brand of “pension spiking”, although perfectly legal, could cost California $800 million over the next 20 years. From California Healthline:

Dozens of public agencies that contract with CalPERS have engaged in a legal form of pension spiking, putting the state on the hook for nearly $800 million over the next 20 years, according to an audit released Tuesday by the State Controller’s Office, AP/KPCC’s “KPCC News” reports (“KPCC News,” AP/KPCC, 9/9).

The legal practice involves employers withdrawing commitments to cover employees’ pension costs in their final year of work and instead adding the value of the payment to the employee’s salary. The practice was legal under a 1993 law but has since been prohibited for new employees.

The audit found that 97 agencies that contract with CalPERS have amendments allowing them to engage in the practice.

The amendments increased CalPERS members’ compensation by $39.1 million in pensionable pay annually, which could result in as much as $796 million in such compensation over two decades.

The audit found that CalPERS doesn’t have the resources to audit the 3,000 agencies with which it contracts. CalPERS said it has hired more staff recently to combat that issue, but it’s not enough. From California Healthline:

The pension fund also has insufficient resources for auditing all of the 3,100 public agencies with which it contracts. For example, the audit found that a local government contracting with CalPERS would only be audited by the pension fund every 66 years. Since the audit was performed, CalPERS has hired more staff, but the agency is still only capable of performing audits on a contracting entity once every 33 years, according to the controller’s office.

In a release, Controller John Chiang (D) said the prevalence of such issues “invites abuse” and that the pension fund “must be more vigorous in protecting taxpayers from this form of public theft.”

View the Controller’s entire audit here.

Photo credit: Lending Memo

California Unveils Finance Data Website; Pension Data To Be Added Later

California has launched ByTheNumbers.sco.ca.gov, a website designed to give citizens easy access to financial data for every city and county in the state.

The website, launched by Controller John Chiang, will eventually contain data for all of the more than 100 pension funds in California. That data will include investment returns, administrative costs, assets and liabilities.

From the Fresno Bee:

ByTheNumbers.sco.ca.gov allows taxpayers to track revenues, expenditures, liabilities, assets, fund balances and other information provided by more than 450 cities and the 58 counties statewide. The data runs from fiscal year 2002-03 through 2012-13.

Controller John Chiang, who is running for state treasurer, said in a statement that the website is moving government information “out of the analog dark ages into the digital era.”

The website allows users to download raw figures, convert them into charts and share the information freely. Chiang’s office said the data will be refreshed each year with updates sent in by local governments.

Chiang is a member of the boards of both major California pension funds, CalPERS and CalSTRS.

CalPERS’ Withdrawal From Hedge Funds Not Yet Indicative of Broader Trend

California is a bellwether for the rest of the country in many ways – and that sentiment applies to pension fund investment strategy, as well.

CalPERS made headlines this summer when it announced its decision to cut its hedge fund investments by nearly 50 percent. A handful of other funds, like the Los Angeles Fire and Police Pensions system and the Louisiana Firefighters’ Retirement System, have made similar decisions.

But those within the industry say none of that is indicative of a wider trend. From the Financial Times:

Alper Ince, managing director at Paamco, a California-based fund of hedge funds with $9bn of assets, believes that Calpers’ decision is unlikely to be indicative of a wider trend because “hedge fund investing has now become mainstream for pension funds”.

Arno Kitts, head of UK institutional at BlackRock, agrees: “People do pay attention to Calpers but there are plenty of hedge funds that have delivered consistent long-term performance with good risk-adjusted returns, which are uncorrelated with other assets.”

US public pension funds account for approximately 14 per cent of hedge fund assets owned by institutions, according to Preqin, the data provider.

Amy Bensted, head of hedge fund products at Preqin, says the shift by Calpers could fuel concerns that US public pension schemes are losing faith in the hedge fund industry.

“But I don’t think this is the start of a trend. The majority of US public pension schemes remain committed,” she says.

She points out that US pension funds in aggregate have been increasing their allocations to hedge funds steadily in recent years, a trend that has continued into 2014.

A recent Preqin survey found that 34 percent of hedge funds received more capital from pension funds in the first half of 2014 than they did in the second half of 2013.

Someone Is Stealing The Campaign Signs Of CalPERS Board Candidates

Two candidates running for a spot on CalPERS’ board—David Miller and Theresa Taylor—have noticed one similarity in their campaigns: their signs are disappearing. From the Sacramento Bee’s State Worker blog:

In an email to The State Worker, Taylor suggested that Miller’s signs may have been taken down by CalPERS for violating election rules. And she forwarded a cordial email exchange between her campaign consultant and Miller about vanishing signs on both sides:

“… Just a friendly heads up that there seem to be some campaign sign thieves operating in the downtown area,” Miller wrote in a Wednesday email that Taylor forwarded to The State Worker. “Quite a few of my campaign signs have disappeared over the last few days and my campaign workers confronted a couple of the sign thieves just today while working for me downtown. It doesn’t appear that your signs have been targeted but I thought I would let you know so your folks can keep a lookout as well.”

Taylor consultant Scott Adams replied to Miller’s email: “… We too are experiencing our signs disappearing from posted locations. Unlike your guys, we have not spotted any sign thievery in progress. We just started noticing the removal of our signs so it appears to be a recent development. I can’t imagine anyone wanting to collect these as souvenirs – but you never know. Thanks for the note. I will pass it on to Theresa.”

On Friday, Miller said that he doesn’t believe Taylor’s campaign is responsible for the thefts.

“I think it most likely that some overzealous supporters took it upon themselves,” Miller said, “to help their candidate by removing my signs.”

Taylor suggested that some of Miller’s signs could have been removed by none other than CalPERS. The fund might have taken down the signs if they were placed on the fund’s property, which violates election guidelines.

Photo by Dvortygirl via Flickr CC License

CalPERS, Harvard Money Linked To Caribbean Pay Day Loan Venture

A unique series of events exposed this week a controversial investment made by a handful of institutional investors.

Institutional investors such as Harvard and CalPERS invested a combined $1.2 billion with a private equity fund, Vector Capital IV LP. But Vector soon tried investors’ patience, as it was slow to invest that money.

Eventually, some investors threatened to pull out altogether—which led Vector to make the quick decision to invest in Cane Bay Partners VI LLLP, a company that ran numerous pay day loan sites in the Caribbean and charged up to 600 percent interest for a loan. From Bloomberg:

By 2012, investors including Harvard University were upset that about half the money [invested with Vector] hadn’t been used, according to three people with direct knowledge of the situation.

Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600% interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

Mr. Slusky’s fund, Vector Capital IV, bought into Cane Bay a year and a half ago, according to three people who used to work at Vector Capital and the former Cane Bay employees. One ex-Vector employee said the private equity firm didn’t tell investors the company is in the payday lending business, for which borrowers repay loans out of their next paychecks.

Pay day loans are controversial because they charge high interest rates on loans given to people who are usually in a financial bind to begin with.

Many states in the US have banned the practice, which has forced the businesses to go online.

For now, Cane Bay Partners claims it is only a “management-consulting and analytics company”.

Photo by www.panamacity-hotels.travel

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712