Institutions to Increase Hedge Fund Allocations Despite Calpers

Terry Flanagan

The majority of institutional investors intend to increase their hedge fund investments despite the California Public Employees’ Retirement System withdrawing its allocations according to the Alternative Investment Management Association.

Calpers, the largest US public pension fund, is divesting $4bn from 24 hedge funds and six hedge fund-of-funds.

Ted Eliopoulos, interim chief investment officer of Calpers, told Bloomberg in a television interview: “We do not believe for Calpers’ scale, that we could grow the hedge fund program to a scale that would be meaningful.”

Jack Inglis, chief executive of the AIMA, which represents the global hedge fund industry, said in a statement that Calpers’ exit from hedge funds bucks the trend as assets have reached a record this year. Institutional investors have increased inflows into hedge funds because they want capital preservation, reduced volatility, more diversification and strong risk-adjusted returns according to the AIMA.

“A number of surveys have revealed that the majority of institutional investors are satisfied with their hedge fund allocations and intend to increase, not shrink, those allocations,” added Inglis.

A recent AIMA paper claimed hedge funds outperformed equities and bonds on a risk-adjusted basis over the five years to the end of 2013, even when fees were taken into account. Calpers paid $135m in fees or hedge fund investments that returned 7.1% in its last fiscal year according to the pension scheme.

Preqin, the data provider, agreed that US public pension funds are, on average, increasing their allocations to hedge funds and are investing more than ever in the asset class.

Amy Bensted, Preqin’s head of hedge fund products, said in a report that the importance of hedge funds as a source of risk-adjusted returns is likely to continue to be attractive for US pension schemes.

“With much of the recent criticism on hedge funds focusing on the apparent under performance of the asset class compared to the equity markets, it is important to recognize how investors are judging the performance of these funds,” added Bensted. “Preqin’s recent research highlights that investors are not using hedge funds to produce outsized returns, but instead to produce uncorrelated, risk-adjusted returns.”

Preqin said hedge funds have in general met investor needs for risk-adjusted returns over short and longer time frames.

“However 2014 has been a period of relatively turbulent returns when looking at Preqin’s monthly benchmarks; in times like this, investor calls for changes in fee structures and better alignment of interests become more vocal, and this clearly has had an impact on Calpers’ decision,” said Bensted.

In the UK, the Department for Communities and Local Government has been consulting on whether significant cost savings can be made in the 89 local government pension funds in England and Wales by moving to passive investment strategies and collective investment vehicles.

In response the UK’s National Association of Pension Funds has recommended that the use of passive investment should not be mandatory.

Joanne Segars, chief executive, NAPF, said in a statement: “The Government is mistaken in thinking the local government pension schemes can be treated as a homogenous whole when it is comprised of 89 different funds, some of which already perform extremely well. A subtler and more intelligent approach than that outlined by the Government is required if we are to ensure funds with good performance are not hamstrung to help those that perform poorly.”

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