Calpers puling out of hedge funds.\u00a0 Are hedge funds toxic?<\/p>\n
Mohamed A. El-Erian writes:\u00a0 The decision of the California Public Employees’ Retirement System to pull out of its hedge-fund investments continues to attract lots of attention, and understandably so. Calpers is the largest U.S. pension fund and is among those that continue to seek a relatively high rate of return to help pay the health and retirement benefits of millions of public employees. It is also highly respected.<\/p>\n
The observers who analyzed the Calpers withdrawal focused on three drivers cited by the institution itself: cost, complexity and scale.<\/p>\n
The cost argument is the most straightforward. Most hedge funds still try to apply a \u201c2 and 20\u201d model in which they charge their investors a fee of 2 percent of assets they manage and keep 20 percent of the gains above a specified level. For this, clients have access to the ability to leverage, customize derivatives, and to take long or short positions on particular securities.\u00a0 As such, these investments have the potential to generate positive (or \u201cabsolute\u201d) returns regardless of cycles and market conditions.<\/p>\n
Fees.\u00a0 The 2 percent fee is harder to sell to investors in a world of lower expected returns.\u00a0 It becomes even harder when clients also face the challenge of continuously identifying top-performing managers to invest with.<\/p>\n
Managers.\u00a0 The selection of an investment manager is a complex science, as well as an art. I Only a small number of firms (such as the Baupost Group under the leadership of Seth Klarman) have been able to maintain consistently superior performance over time.<\/p>\n
Scale.\u00a0 For hedge funds to make a material difference, Calpers needed to invest significant dollars in a space where incremental returns could easily have zero-sum characteristics — meaning a loss for every gain.<\/p>\n
All these elements speak to a broader historical phenomenon. The use of hedge funds became popular in the last decade as many institutional investors sought to replicate the \u201cendowment model\u201d first pursued by foundations and universities. This model seeks to go where others aren\u2019t, taking advantage of the long-term nature of the investible funds (\u201cpermanent capital\u201d).<\/p>\n
But the resulting migration, which has been considerable in recent years, has inevitably eroded its potential for generating revenue — as have the increasingly \u201cwinner takes all\u201d outcomes that now dominate some particularly enticing investment destinations.<\/p>\n
Outperforming others by diverging from the consensus becomes a lot more difficult if the consensus is joining you. That is what occurred to Calpers and other investors that had looked to hedge funds as a reliable source of superior absolute returns.<\/p>\n
This is all the more reason that investors have to do an even better job in their selection of managers. While the result is likely to be lower growth in the overall allocations to hedge funds, the substitutes should not be limited to traditional public markets.<\/p>\n
Given today\u2019s realities, investors many may need to develop greater in-house expertise to invest opportunistically in a bigger range of one-off single assets — particularly those done directly.<\/p>\n
In that way, they can take advantage of the coming disposal of assets by the restructuring European banks, of the enormous need for infrastructure development, and of the opportunity to better match demand and supply in the more stable emerging economies.<\/p>\n
Calpers puling out of hedge funds.\u00a0 Are hedge funds toxic? Mohamed A. El-Erian writes:\u00a0 The decision of the California Public Employees’ Retirement System to pull out of its hedge-fund investments continues to attract lots of attention, and understandably so. Calpers … Continue reading ![\"Calpers](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/10\/Calpers-Cuts-Hedge-FUnds-300x226.jpg\")
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