George Soros: Hedge Funds “Not a Winning Strategy” For Pensions

George Soros

Hedge fund guru George Soros said at the Davos Economic Forum last week that he doesn’t think pension funds should be investing in hedge funds. He cited the current market, management fees and recent under-performance as reasons for his view.

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George Soros echoed Warren Buffett’s concerns about the intersection of hedge funds and pension funds.

Speaking at the Davos Economic Forum last week, Soros said that pension funds should avoid investing in hedge funds and warned of increased risks and concerns about the global middle class and retirees. Soros cited hedge fund management fees in his argument that pushing public employee money into hedge funds is foolish.

“Current market conditions are difficult for hedge funds,” said Soros. “Their performance tends to be equal to the average plus or minus a 20 percent management fee.”

“You will always have some hedge funds that will provide outside performance …” he continued. “To put a large portfolio into a hedge fund is not a winning strategy.”

Soros founded Soros Fund Management in the late 60’s. For decades, it was one of the best-performing firms in the hedge fund industry.


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Preqin: Hedge Funds Grew More Than Any Alternative in 2014

balanceHedge funds experienced the most asset growth of any alternative asset class in 2014, according to a Preqin report.

Despite scrutiny over low returns and high expenses, investors put more money into hedge funds in 2014 than private equity, infrastructure or venture capital.

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Despite a disappointing year for returns and some high-profile withdrawals from the sector, Preqin’s “2015 Global Alternatives Report” showed that hedge fund industry assets grew by roughly $360 billion during the year.

This accounted for more than half of the $690 billion increase in total assets invested across hedge funds, private equity, venture capital, private real estate, and infrastructure. In total, Preqin estimated $6.91 trillion was invested across these sectors.

“The recent news of CalPERS cutting hedge funds and reducing the number of private equity partnerships within its portfolio does not reflect the wider sentiment in the industry,” said Mark O’Hare, CEO of Preqin.

“From our conversations with investors, the majority of investors remain confident in the ability of alternative assets to help achieve portfolio objectives.”

However, Preqin predicted that investors would continue to scrutinise hedge fund performance and fees during 2015.

Preqin’s “2015 Global Alternatives Report” can be bought here.

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

Chart: Negotiating Hedge Fund Expenses

cap negotiation

A recent survey asked investors: have you negotiated a cap on direct expenses with your hedge funds managers? This chart, above, displays the results.

The 2013 version of the same survey found that fees were the biggest obstacle for institutional investors looking to put money in hedge funds:

Screen shot 2014-11-07 at 2.27.22 PM


1st chart credit: Ernst & Young 2014 survey

2nd chart credit: Ernst & Young 2013 survey

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

Chart: Institutional Investors’ Planned Allocation To Hedge Funds Over the Next Three Years

Investors planned hedge allocation

An Ernst & Young survey asked institutional investors how they were planning to shift their hedge fund allocations over the next three years.

The 2014 responses can be seen above, paired with responses to the same question from 2012 and 2013.

Chart credit: Ernst & Young 2014 survey

Research Firm: Institutional Investors Still Hungry for Hedge Funds

flying moneyResearch from eVestment indicates institutional investors are still hungry for hedge funds even after a year that saw low returns for the investment vehicles. The research estimates that investors will put at least $90 billion in hedge funds in 2015.

From Money News:

Wealthy investors are poised to put at least $90 billion into hedge funds next year, even after returns have largely been lackluster this year, research firm eVestment said.

Fresh demand from pension funds, endowments, and insurers looking for alternatives to traditional stock and bond holdings will fuel next year’s flows, the researchers wrote in a report.

“Will institutional investors maintain their investments and continue to allocate more to hedge funds in 2015 … The short answer is yes,” they wrote, adding “We expect asset flows into hedge funds of at least between $90 billion and $110 billion in 2015.” Hedge funds manage roughly $3 trillion in assets.

The appetite for hedge funds remains strong even after the $300 billion California Public Employees’ Retirement System, the largest U.S. pension fund, said in September it was pulling out of hedge funds because they are too costly and complicated.

Hedge funds took in roughly $112 billion in new money this year even though returns have been paltry, with the average fund returning roughly 4 percent this year through November. As hedge funds posted low single digit returns, the stock market raced to a series of fresh highs and the Standard & Poor’s 500 index gained 12.8 percent since January. Last year, investors added $62 billion in new money to hedge funds.

The research suggested that investments in stock-oriented hedge funds could slow down, but investments in multi-strategy hedge funds will likely rise in 2015.


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Incoming Massachusetts Governor to Push for Transparency at MBTA Fund

Charlie Baker

Massachusetts Governor-elect Charlie Baker says he will push for more transparency and openness from the MBTA retirement fund.

Baker’s statements come days after it was reported by the Boston Globe that the pension fund posted its annual report a full year late; the fund also waited a year to disclose troubles at a hedge fund that held pension money. The hedge fund is now shutting down in the wake of civil fraud charges brought against its executives.

From the Boston Globe:

The incoming Baker administration will press for greater openness at the MBTA retirement fund and encourage it to operate more like other pensions for public workers, a spokesman for Governor-elect Charlie Baker said Monday.

“The governor-elect wants to protect the pensions of hard-working MBTA employees and feels greater transparency and disclosure could help the pension board make better investment decisions,’’ the spokesman, Tim Buckley, said in a statement. Given the significant investment of taxpayer dollars in the MBTA, he said, Baker “feels it is appropriate to explore ways to align the MBTA pension board’s investment practices with those of other public pension boards.”


Baker’s spokesman declined to offer specifics on how he might tackle the issue. The pension fund is organized as a trust and in 1993 won a Supreme Judicial Court ruling that it does not have to make records public, hold open meetings, or follow the ethics rules of public agencies.


A governor’s main leverage with the MBTA pension fund is indirect. Governors get to appoint people to the seven-member Department of Transportation board, which in turn sends three “management” appointees to the six-member T retirement board.

Read more Pension360 coverage of transparency issues at the MBTA fund here.


Photo by  Marissa Babin via Flickr CC License

Public Pension Hedge Fund Portfolio Returns vs. Benchmarks in 2014

hedge fund returns

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

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