CalPERS Is Cutting Its Private Equity Managers, But That Doesn’t Mean It’s Breaking Up With PE


CalPERS announced this week that it was cutting down the number of private equity managers it employs – possibly by as much as two-thirds.

The change comes in the name of cutting costs. A similar rationale was used when the pension fund decided to exit its entire hedge fund portfolio last year.

But unlike hedge funds, private equity will remain a significant part of CalPERS’ investment strategy going forward.

From the New York Times:

Calpers is not planning to significantly reduce its allocation to private equity, though it may redistribute it, Joe DeAnda, a Calpers spokesman, said in an email. He said the pension fund may increase its allocation to individual private equity managers as it culls the number of managers.

As of October, Calpers had $31.2 billion invested in private equity, or about 10.5 percent of its overall portfolio, according to the most recent disclosure. It aims to have 10 percent of its portfolio allocated to the strategy.


When it comes to private equity, Calpers is also trying to reduce costs. But its approach is more subtle.

Réal Desrochers, the pension’s head of private equity since 2011, announced in late 2013 that Calpers aimed to reduce the number of managers to as few as 100. (DealBook reported on it here.)

In a presentation to the Calpers investment committee in December that year, Mr. Desrochers discussed his review of the pension fund’s private equity portfolio. It included 389 managers at the time.

“I think this portfolio should have — given the size where we are — it should be probably around 100, 120, something like that,” Mr. Desrochers said. (See the 29:15-minute mark in this video.)

In other words, this move has been in the making for a long time.

CalPERS allocates about 10 percent of its assets towards private equity.


Photo by  rocor via Flickr CC License

Dutch Pension Turns $56 Million Profit From Hedge Fund Exit


The Netherlands’ second-largest pension fund, PFZW, decided late in 2014 to completely exit its $2 billion hedge fund portfolio.

Two months later, after a rapid-fire wind down, the pension fund has exited all hedge funds – and it made a $56 million profit in the process.


Dutch healthcare sector pension PFZW netted a $56 million profit in two months as it exited hedge funds last year.

PGGM— which manages assets on behalf of PFZW—completed the majority of the liquidation in November and December. PFZW announced last week that it had closed its allocation to the asset class, citing complexity, costs, and sustainability issues.

Ruulke Bagijn, CIO for private markets at PGGM, said her company had raised $2.44 billion from the sale of the hedge fund holdings.

“The successful liquidation process of PFZW’s capital was driven by skilful use of the unique operational infrastructure PGGM has in place, as well as accommodating market circumstances,” she said.


PFZW’s hedge fund holdings performed in line with expectations and “contributed to diversification of the portfolio”, Bagijn said, but the pension had “a less strong belief in the positive contribution of hedge funds” in the future.

However, Bagijn emphasised that the decision was made by PFZW and would not affect PGGM’s other clients. This is despite Jan Soerensen, PGGM’s head of hedge funds, leaving the group last year.

PFZW manages $185 billion in assets for the country’s health care workers.

Dutch Pension Drops Hedge Funds


The Netherlands’ second-largest pension fund has announced plans to exit its hedge funds investments.

The fund, PFZW, has already began the process of winding down the investments.

The fund cited complexity, lack of performance and excessive costs as reasons for the pullout.

From Reuters:

The Netherlands’ PFZW has become the latest major pension fund to announce it will no longer use hedge funds to manage investments, citing excessive costs, complexity and a lack of performance.


About 2.7 percent of the fund’s assets had been invested with hedge funds in the year 2013, but the pension fund said on Friday that it had “all but eradicated” their use by the end of 2014.

“With hedge funds, you’re certain of the high costs, but uncertain about the return,” the company’s manger for investment policy Jan Willem van Oostveen said.

He added that PFZW wanted to have greater control over of its investments, and that hedge funds’ methods were too complex because of their diverse investment strategies.

In September, the $300 billion California Public Employees’ Retirement System said it had scrapped its hedge fund programme, pulling out about $4 billion.

PFZW manages $185 billion in assets for the country’s health care workers.

Ex-CalPERS Hedge Fund Honcho Joins Chatham


Chatham Asset Management has hired the former chief of CalPERS’ hedge fund strategy, Ed Robertiello.

Ed Robertiello left CalPERS after the pension fund decided to pull its money out of hedge funds.

More from Bloomberg:

Robertiello started Jan. 1 as a partner and director of strategic development, the $1.7 billion Chatham, New Jersey-based firm told clients in a letter today. Robertiello left Calpers in December, three months after it decided to divest the $4 billion it had invested in hedge funds.

Pension funds face challenges meeting their obligations to retirees as the Federal Reserve holds interest rates near zero, said Evan Ratner, Chatham’s head of research.

“Ed’s been in this position for Calpers, so we believe he will prove invaluable in understanding investor needs,” Ratner said in an interview.


“Institutional investors are going to continue to allocate to the industry,” Robertiello said in a phone interview. “We want to make sure Chatham’s prepared for it.”

Chatham’s largest hedge fund, the Chatham Asset High Yield Master Fund, invests in speculative-grade bonds and leveraged loans.

Before joining Calpers in 2012, Robertiello was an executive involved in alternative investments at Russell Investments, Credit Suisse Group AG, and the Blackstone Group LP, according to the letter. He began his finance career investing RJR Nabisco Inc.’s retirement and trust assets.

“We appreciate Ed’s contributions to the Calpers investment office and his work on behalf of our members, and wish him the best with Chatham,” Calpers chief investment officer Ted Eliopoulos said in an e-mail.

In September 2014, CalPERS made the decision to exit its $4 billion hedge fund portfolio.


Photo by  rocor via Flickr CC License

Paul Singer Says CalPERS Was “Wrong to Desert” Hedge Funds

Paul Singer

Paul Singer, a hedge fund manager, activist investor and billionaire, again questioned CalPERS’ decision to pull out of hedge funds at a conference Friday in New York. Heard by Businessweek:

Paul Singer, who runs hedge fund firm Elliott Management, said the decision by the California Public Employees’ Retirement System to stop investing with hedge funds was a mistake.

“Calpers is not too big to have a group of trading firms in their mix,” Singer said today at a conference in New York sponsored by the New York Times’ DealBook. “I think they are wrong to desert the asset class.”

The remarks were brief – but it’s not the first time he’s expressed the sentiment. Last month, he made similar statements in a letter to clients of his firm Elliott Management. Pension360 covered the remarks, which were originally reported by CNBC:

“We are certainly not in a position to be opining on the ‘asset class’ of hedge funds, or on any of the specific funds that were held or rejected by CalPERS, but we think the decision to abandon hedge funds altogether is off-base,” Singer wrote in a recent letter to clients of his $25.4 billion Elliott Management Corp.


On complexity, Singer wrote that it should be a positive.

“It is precisely complexity that provides the opportunity for certain managers to generate different patterns of returns than those available from securities, markets and styles that are accessible to anyone and everyone,” the letter said.

He went on:

“We also never understood the discussions framed around full transparency. While nobody wants to invest in a black box, Elliott (and other funds) trade positions that could be harmed by public knowledge of their size, short-term direction or even their identity.”

Singer also slammed CalPERs for its complaint about the relative high cost of hedge funds.

“We at Elliott do not understand manager selection criteria based on the level of fees rather than on the result that investors could reasonably expect after fees and expenses are taken into account,” he wrote.

The broader point Singer makes is on the enduring value of hedge funds to diversify a portfolio.

“Current bond prices seem to create a modest performance comparator for some well-managed hedge funds. Moreover, stocks are priced to be consistent with bond prices, and we have a hard time envisioning double-digit annual stock index gains in the next few years,” the letter said.

“Many hedge funds may have as much trouble in the next few years as institutional investors, but investors should be looking for the prospective survivors of the next rounds of real market turmoil.”


Photo by World Economic Forum via Wikimedia Commons

Video: CalPERS CIO Talks Hedge Fund Exit, Market Risk of Climate Change and Corporate Tax Avoidance

The above video features an interview with CalPERS chief investment officer Ted Eliopoulos. Topics include CalPERS’ hedge fund exit, the fund’s stance on corporate tax avoidance, and how climate change has impacted the fund’s portfolio. summarizes a few key points from the interview. On hedge funds:

“One of our prime considerations in reviewing the program is whether we believe we could scale the program to a much more significant part of the overall portfolio,” he said. “Our analysis, after very careful review, was that mainly because of the complexity of the hedge fund portfolio and the cost we weren’t comfortable scaling the program to a much greater size than it currently held.”

On corporate tax inversion:

Eliopoulos emphasised that, in general, tax was something to be addressed by relevant governments as a policy issue, but expressed concern about corporate inversions.
“We think the best approach is for the US government to address this type of a loophole in the context of overall corporate tax reform, and we’ve urged the government to get at it,” he said.

Video: California CIO On Why He Thinks Divesting From Hedge Funds Doesn’t Make Sense

The above video features Sean Bill, CIO of Santa Clara Valley Transportation Authority and trustee for the City of San Jose. During the interview, he touches on CalPERS’ hedge fund exit, why he thinks the move was “political”, and the difficult of handling investments in-house.


Video from Chief Investment Officer magazine.

Deutsche Bank: CalPERS’ Hedge Fund Exit “Has No Bearing” On Allocations Of Institutional Investors

The CalPERS Building in West Sacramento, California.
The CalPERS Building in West Sacramento, California.

Deutsche Bank says that after a series of meetings this month with institutional investors, they’ve concluded that CalPERS’ hedge fund exit “has no bearing on most investors commitment to the industry.”

From ValueWalk:

Deutsche Bank prime brokerage notes that hedge funds have been engaged in “extreme protection buying in equities” and said that the recent exit from hedge funds by CalPERS “has no bearing on most investors commitment to the industry.”

After speaking with the institutional investor community regarding their commitment to maintain their hedge fund allocations, Deutsche Bank’s Capital Introductions group reports this positive message that it says was bolstered by recent meetings with Canadian pensions and global insurance companies throughout the month, while a trip to Munich indicated an increase in hedge fund exposure from institutions.


Separate hedge fund observers, meanwhile will be watching numeric asset flow patterns in December and the first quarter of 2015 to determine on an objective basis if there has been a statistical move away from hedge funds.

Even if institutional investors on the whole aren’t moving away from hedge funds, the exit by CalPERS – and the public debate swirling around the investment expenses associated with hedge funds – has forced some hedge funds to reconsider their fee structures. From the Wall Street Journal:

Two titans of the hedge-fund and private-equity world say they are growing more open to reducing fees in the face of rising scrutiny of the compensation paid to managers of so-called alternative investments.


Mr. [John] Paulson [founder of hedge fund firm Paulson & Co.] said he feels “pressure” to act in the wake of “enormous numbers in compensation” for hedge fund managers. Mr. Paulson, 58, earned a reported $2.3 billion last year, counting both fees and the appreciation of his own personal investment in his funds.

“Institutions are becoming a little more demanding…they are putting pressure on the management fee and the incentive fee,” he said Monday during a panel discussion at New York University’s Stern School of Business.

Joseph Landy, co-CEO of $39 billion buyout shop Warburg Pincus, echoed Mr. Paulson’s experience.

“There are a lot of private-equity managers out there who can make a lot of money before they return a dime to investors,” Mr. Landy said. “Most of the pressure [to reduce fees] has been on the actual annual management fee.”

Neither he nor Mr. Paulson, however, were too concerned about any widespread threats to their businesses.

“We came out relatively unscathed from the crisis. We’re doing pretty much the same things we did as before [with] very little restrictions on how we invest the money,” Mr. Paulson said.

Paulson said he think more hedge funds will start using “hurdles”, a fee structure which prevents managers from collecting performance fees until they’ve met a certain benchmark return.


Photo by Stephen Curtin

Chart: Comparing CalPERS to the Endowment Index

Endowment Index chart

The Endowment Index represents the asset allocation and returns of the world’s largest institutional investors.

The this chart [above], you can compare the asset allocation and 10-year returns of CalPERS to other massive institutional investors. This chart represents CalPERS’ allocation before its hedge fund exit, which is an ongoing process.

More on the Endowment Index:

The Endowment IndexTM is an objective benchmark for investors who implement a three dimensional portfolio that incorporates alternative investments. This investable* index is used for portfolio comparison, investment analysis, research and benchmarking purposes by fiduciaries such as trustees, portfolio managers, consultants and advisors to endowments, foundations, trusts, DB/DC plans, pension plans and individual investors. The Endowment IndexTM has been co-created by Endowment Wealth Management, Inc. and ETF Model Solutions, LLC.

Chart courtesy of Endowment Wealth Management.

What Does CalPERS’ Hedge Fund Pullout Mean For the “Average” Investor?

one dollar bill

Larry Zimpleman, chairman and president of Principal Financial Group, has written a short piece in the Wall Street Journal today detailing his reaction to CalPERS cutting hedge funds out of their portfolio and what the move means for the average investor.

From the WSJ:

I was very interested (and a bit surprised) to read about the decision of Calpers (the California Public Retirement System) to move completely out of hedge funds for their $300 billion portfolio.

While I haven’t visited directly with anyone at Calpers about the reasons for their decision, from the stories I’ve read, it seems to be a combination of two things. First, it’s not clear that hedge-fund returns overall are any better than a well-diversified portfolio (although the management fees of hedge funds are much higher). Second, hedge funds had only about a 1% allocation in the overall portfolio. So even if they did provide a superior return, it would have a negligible impact on overall performance.

What’s the takeaway for the average investor? First, if you have “alternatives” (like hedge funds) in your own portfolio, they need to be a meaningful percentage of your portfolio (something like a 5% minimum). Second, take a hard look at the recent performance against the management fees and think about that net return as compared to a well-diversified stock and bond portfolio. Hedge funds are, as their name implies, set up more for absolute performance and outperformance during stressed times. If you’re a long-term investor that believes in diversification and can tolerate volatility, hedge funds may be expensive relative to the value they provide, given your long-term outlook.

Principal Financial Group is one of the largest investment firms in the world and also sells retirement products.

Zimpleman’s post was part of the WSJ’s “The Expert” series, where industry leaders give their thoughts on a topic on their choice.

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