Here’s a chart listing the strongest-performing hedge fund portfolios over the 12 month period ended September 30, 2014.
You can also see whether or not the portfolio outperformed its benchmark, and the percentage of system assets dedicated to hedge funds.
Chart credit: Pensions & Investments
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.
There is a growing desire by funds around the country to avoid large investment fees, and that trend has led many funds to reduce their investments in hedge funds. Now, CalPERS has hopped on that train. From MarketWatch:
[CalPERS’] hedge-fund investment is expected to drop this year by 40%, to $3 billion, amid a review of that part of the portfolio, said a person familiar with the changes. A spokesman declined to comment on the size of the reduction but said the fund is taking more of a “back-to-basics approach” with its holdings.
CalPERS’ decision comes on the heels of a similar move by the Los Angeles Fire and Police Pensions fund. The difference is, the LA fund separated itself from hedge funds altogether. From MarketWatch:
The officials overseeing pensions for Los Angeles’s fire and police employees decided last year to get out of hedge funds altogether after an investment of $500 million produced a return of less than 2% over seven years, according to Los Angeles Fire and Police Pensions General Manager Ray Ciranna. The hedge-fund investment was just 4% of the pension’s total portfolio and yet $15 million a year in fees went to hedge-fund managers, 17% of all fees paid by the fund.
The HFRI Fund Weighted Composite Index, which measured hedge fund performance, indicated hedge funds returned 3.2 percent in the first six months of 2013, compared to a 7.1 return for the S&P 500 index.