CalPERS to Cut Investment Fees by 8 Percent Next Year

Calpers

CalPERS calculates that it will cut investment-related fees by 8 percent in fiscal year 2015-16, according to a report by Bloomberg.

The pension fund has been looking to cut costs recently by reducing the number of private equity managers it invests with and moving more investment management in-house.

According to CalPERS’ proposed budget, obtained by Bloomberg, the 8 percent decrease in fees will come from several areas:

Calpers projects it will pay about $100 million less in fees for hedge-fund investments. The pension has said it would take about a year to unwind all its holdings. It paid $135 million in fees in the fiscal year that ended June 30 for hedge-fund investments, which earned 7.1 percent and added 0.4 percent to its total return, according to Calpers figures.

Brad Pacheco, spokesman for the pension fund, wasn’t immediately available for comment.

Base fees for private-equity investments are projected to decline 7.5 percent to $440.6 million as some investments matured, the number of managers was reduced and Calpers won better terms for new deals.

Base fees for company stock managers are projected to increase 25 percent to $51.3 million. Fees for performance are projected to decrease by $32.6 million because of favorable renegotiated contract terms, Calpers said.

[…]

The largest U.S. state pension fund, known as Calpers, projects that it will pay $930.7 million in base and performance fees to investment firms in the fiscal year that begins July 1, down from more than $1 billion this year and $1.3 billion last year, according to the fund’s proposed budget.

CalPERS managed $295.8 billion in assets as of December 31, 2014.

 

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Report: Hedge Fund Assets Will Continue Growing in 2015, But Executives Recognize Underperformance

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A new survey, released Tuesday by Deutsche Bank, reveals that hedge fund executives expect hedge fund assets to grow by 7 percent and exceed $3 trillion in 2015, including $60 billion of net inflows.

But the majority of executives and investors surveyed – 66 percent – also recognized that hedge funds underperformed in 2014.

From the Wall Street Journal:

Investors included in the survey had on average expected returns of 8.1%, but said they only got returns of 5.3%.

[…]

However, some investors are planning to invest more in hedge funds, despite last year’s lackluster returns.

The survey said 39% of investors plan to increase allocations to hedge funds this year, including 22% who expect to increase the size of their allocations by $100 million or more.

Other key findings from the survey, from a Deutsche Bank press release:

Investors are looking for steady and predictable risk-adjusted returns – Investors risk/return expectations for traditional hedge fund products continues to come down in favor of steady and predictable performance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% last year.

With this in mind, however, 40% of respondents now co-invest with hedge fund managers as a way to increase exposure to a manager’s best ideas and enhance returns. 72% of these investors plan to increase their allocation in 2015.

Investors see increasing opportunity in Asia – 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. Even more noteworthy is the growing percentage of investors who see opportunity in China, up to 25% from 11% by AUM, year-on-year. India is expected to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.

 

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Chart: How Institutional Investors Are Changing Their Allocations to Alternatives in 2015

target allocations to alternative assets

Here’s a graphic that shows the percentage of institutional investors that are planning to change their target allocations to various alternative asset classes in 2015.

When it comes to increasing target allocations, 39 percent of institutional investors say they are going to increase their private equity investments in 2015.

Hedge funds may take the biggest hit; 34 percent of investors say they are decreasing their allocations to hedge funds in the coming year.

 

Chart credit: Coller Capital‘s Global Private Equity Barometer Winter 2014-2015

UK Hedge Funds Paid Record Taxes in 2014, Says Group

moneyAn industry trade association reported this week that UK hedge funds paid a record amount of taxes in 2014 – and that the industry paid over $2.5 billion more in taxes last year than in 2009.

The report comes from the Alternative Investment Management Association, a global hedge fund trade association.

From ValueWalk:

The report indicated that the UK Hedge Funds paid approximately £4 [$6.16] billion in taxes to the HM Revenue and Customs last year, an increase of around £1.7 [$2.63] billion in 2009.

According to AIMA, the growth of the hedge fund industry and the recent changes in the tax system in the United Kingdom was the primary reason behind the increase in tax contribution.

The association forecasted that the tax payments of UK hedge funds will increase further in 2015 due to the changes in partnership tax rules that were implemented last year.

According to AIMA, the £4 billion in tax payments by UK hedge funds last year could pay for approximately a dozen new NHS hospitals. The associations released the data amid claims that the hedge funds are exploiting loopholes or tax breaks to avoid paying stamp tax on UK share purchases.

[…]

In a statement, AIMA CEO Jack Ingles said, “Despite some of the recent highly publicized claims, it is clear that the tax contribution of the 500 firms and 40,000 people working in the hedge fund sector in Britain has actually increased to record levels in recent years.”

Read the AIMA release here.

 

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San Francisco Pension Approves 5 Percent Allocation to Hedge Funds

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After months of discussion and delays, the San Francisco Employees Retirement System on Wednesday voted to invest up to 5 percent of its assets in hedge funds.

The pension fund has not previously invested in hedge funds. Its investment staff had previously recommended a 10 and a 15 percent allocation, but the board voted 6-1 for a 5 percent investment.

More from SF Gate:

The staff, headed by William Coaker, who joined the pension system last February as chief investment officer, evaluated the new proposal and came up with another of its own, which was approved by the board.

It will reduce the target allocation for U.S. and foreign stocks to 40 percent from 47 percent, increase private equity investments to 18 percent from 16 percent, increase real assets including real estate to 17 percent from 12 percent, reduce bonds and other fixed income to 20 percent from 25 percent and increase hedge funds to 5 percent from zero.

It does not call for investing specifically in Bay Area real estate, which the fund already does to some extent.

[…]

Coaker said he wanted a stake in hedge funds to help reduce the portfolio’s volatility and prevent the steep losses suffered during the 2008 stock market crash. Its assets dropped from $17 billion before the crash to a low of $11 billion. To help make up the shortfall, the city and employees increased their contributions to the fund.

In a memo issued Wednesday, Coaker said the staff had “taken into account the concerns” of city workers and retirees, but said it still believes hedge funds “can play an important role to increase the stability of our funded status, improve our performance in down markets, reduce our beta (volatility), and increase or alpha (or excess returns over the broad market).”

The only board member who voted against the proposal was Herb Meiberger, who previously worked as a security analyst with the pension system. “I just don’t think this is the answer,” he said.

The San Francisco Employees’ Retirement System manages $20 billion in assets.

 

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San Francisco Pension Investment Staff Recommends Foray Into Hedge Funds

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The investment staff of the San Francisco Employees’ Retirement System (SFERS) has recommended to the board that the system allocate up to 10 percent of its assets in hedge funds.

SFERS has been waffling for a year over whether or not to put money into hedge funds, and what the allocation should be.

From Bloomberg, via FinAlternatives:

The San Francisco Employees’ Retirement System staff is recommending its board consider investing 10 percent of assets in hedge funds.

[…]

The staff said it also could support a 5 percent hedge-fund allocation for the $20 billion city pension, according to a memo sent to the board from William Coaker, the chief investment officer. The board is scheduled to consider the recommendation at a Feb. 11 meeting in San Francisco.

“Many of the objections we have heard about hedge funds are at best an incomplete picture,” Coaker’s memo said. “Hedge funds have less than half the volatility of the equity market. Transparency is improving in the hedge-fund industry as a whole.”

The San Francisco pension board in December postponed a decision on adding hedge funds to its investment mix and asked staff for a more detailed analysis ahead of this month’s meeting. The fund isn’t currently invested in hedge funds, which are loosely regulated investment pools that are generally open only to high-net-worth and institutional investors.

The San Francisco Employees’ Retirement System manages $20 billion in assets.

 

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How Hedge Funds Keep Winning Clients Despite Prolonged Slump

Graph With Stacks Of Coins

The average hedge fund has returned 5.1 percent annually over the last 10 years, according to HFR, a hedge fund data firm.

The investment vehicle has even been outperformed by many “balanced” mutual funds. But the flow of clients to hedge funds isn’t slowing down, which begs the question: how do hedge funds keep winning clients when performance is so paltry?

Gregory Zuckerman dives into that question and comes up with some interesting answers:

How to explain the paradox of a superhot investment vehicle producing ice-cold returns for clients more smitten than ever?

Part of the reason for the lackluster returns: Hedge funds don’t have the same incentive to hit home runs they once did. They can charge management fees of close to 2% of assets. As the industry swells, many managers can get rich just keeping their funds afloat. A decent performance and no huge loss will do just fine.

The head of one of the world’s largest funds recently told me his challenge is to get his traders to embrace more risk, not less. Hedge-fund traders are more conservative because it’s in their self-interest to be more conservative.

There are similar ways to explain why hedge-fund clients aren’t up in arms. Some see an expensive market and want to be in a vehicle that should do better in a downturn.

But others simply want to keep their jobs. Recommending low-cost balanced mutual funds can be hard to justify if one has a well-paid job at a big pension fund or endowment. Properly allocating money to hedge funds is seen as a bigger challenge. Investing in brand-name hedge funds instead of big stocks once might have put an institutional investor’s career on thin ice. Today, avoiding popular hedge funds to wager on the market is seen as a risky career move.

Read more from his piece here.

 

Photo credit: www.SeniorLiving.Org

For CalPERS CIO, Lack of Stock and Bond Experience Not a Problem

Calpers

The LA Times on Sunday published an interesting and thorough profile of CalPERS chief investment officer Ted Eliopoulos.

It chronicles Eliopoulos’ beginnings as an Ivy League tennis star, his appointment to CIO of the country’s largest public pension fund, and his headline-making decision to pull out from hedge funds.

The piece also dives into why Eliopoulos was an interesting choice for the CIO position, given that he was an expert in real estate but had little experience with stocks or bonds.

From the LA Times:

In turning to Eliopoulos, a consummate insider, CalPERS’ board made what is in some ways an odd choice.

Trained as a lawyer, not an investment professional, Eliopoulos has spent much of his career in state bureaucracies and had never directly managed stocks or bonds — more than 70% of the total CalPERS portfolio — before being named interim chief investment officer a year ago.

His area of expertise had been in buying, selling and managing real estate, which makes up only 10% of CalPERS’ portfolio and remains a rehabilitation effort.

[…]

Some believe even the most deft investor can’t keep the system solvent over the long term. But his supporters said he’s up to the task.

Former state Treasurer and Democratic Party Chairman Phil Angelides called Eliopoulos, whom he mentored, a methodical thinker and steady manager.

“He’s not threatened by having good, strong people around him,” Angelides said.

[…]

His lack of stock-and-bond experience may matter less than his ability to manage the massive investment operation that includes 400 in-house staffers and dozens of highly paid consultants and advisors, said investment professionals.

“It’s perfectly possible to be a very effective leader even if you don’t have all the experience in the weeds,” said Michael Rosen, a principal at Angeles Investment Advisors, which advises institutional investors.

Read the whole profile here.

 

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Report: Hedge Funds Expect Pensions To Up Their Allocations in 2015

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State Street has published a new report, titled The Alpha Game, which analyzes a survey that quizzed 235 hedge fund managers on what the future holds for pensions investing in hedge funds, and other industry trends.

The majority of managers think pension funds will increase their hedge fund holdings over the next few years.

Some key points, from ValueWalk:

The State Street report points out that hedge fund managers are expecting increased capital flows over the next few years. The survey highlighted that nearly two-thirds (65%) of hedge fund managers anticipate ultra-high-net-worth investors will increase their hedge fund holdings, and almost the same number (63%) expect institutional investors will also up their alternative positions. Furthermore, over half (55%) of managers believe pension funds will increase their allocations to alternatives as they look for improved performance and greater diversification

Hedge fund managers also think the main reason for pension funds reducing exposure to Hedge Funds will be disappointment with returns. Nearly half (47%) noted this as their primary concern. The report noter: “This highlights the sharp focus on hedge funds’ ability to deliver value and align with institutional needs.”

Over half of the hedge fund professionals surveyed (53%) think the main reason why pension funds will invest more in hedge funds is to try and boost portfolio performance. Just over one-third (35%) think pension funds are mostly trying to improve portfolio diversification.

The full report can be read here.

 

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University of California Snags CIO from Sacramento Pension

California

The University of California has hired former Sacramento County pension chief Scott Chan, according to Chief Investment Officer.

Chan, who will reportedly start on February 17, will be the University’s managing director of public equity.

More from Chief Investment Officer:

Chan has been named senior managing director of public equity, responsible for upwards of $35 billion in endowment, retirement, and operational assets.

The former hedge fund manager took over the Sacramento County Employees’ Retirement System in 2010. Under Chan’s leadership, the $7 billion portfolio climbed from five-year returns in the bottom quartile of public plans to the 53rd percentile as of September 30, 2014.

He spearheaded several opportunistic plays, including a separate account for purchasing discounted infrastructure secondaries. Last month, Chan and the fund took home the CIO Industry Innovation Award for public plans under $15 billion.

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[Jagdeep] Bachher, who took over as CIO in April 2014, has executed a nearly wholesale overhaul of the division’s staff, organizational structure, and compensation scheme.

Identifying and promoting internal talent was his first step in the reorganization, the Canadian sovereign wealth fund alum told CIO in November.

“Second,” he said, “you need to bring in external people. Target those with experience who’ve had leadership roles. Hence, CIOs at other institutions who want to go back to investing have been very attractive.”

In the last few months, the University of California investment officer has made over a dozen new hires and promotions. Read more about the personnel changes here.