Nation’s LARGEST Union Pension Fund Sends A Shiver Through Hedge Funds

I’m all for change happening through action in the streets. But, it doesn’t hurt to send a little tremor into the world of the elites in other ways. And that’s exactly what the California Public Employees’ Retirement System (CALPERS) has just done.

CALPERS Covers more than 1.3 million active and retired state, local government, and school employees and their family members, essentially all unionized public sector workers. It has $300 billion in assets. Six of the 13 board members are elected by the workers’ representative organizations, and another 2 are chosen by the governor.

When CALPERS acts, the rest of the pension fund world listens.

The California Public Employees’ Retirement System, the nation’s largest pension fund, will eliminate all of its hedge fund investments over the next year on concerns that investments are too complicated and expensive.

The pension fund, which oversees $300 billion, said on Monday that it would liquidate its positions in 24 hedge funds and six hedge fund-of-funds — investments that total $4 billion and more than 1 percent of its total investments under management.

The decision, after months of deliberation by the pension fund’s investment committee, comes as public pensions across the United States are beginning to assess their exposure to hedge funds. It is likely to reverberate across the investment community in the United States, where large investment funds look to Calpers as a model because of its size and the sophistication of its investments.

And:

A growing number of pension funds and institutional investors have expressed concern that the fees that hedge funds charge are too high. While there is a range, hedge funds typically follow a “2 and 20” model where investors pay management fees of 2 percent of the total assets under management and 20 percent of the profit.

These concerns have become more pronounced as performance across the hedge fund industry has disappointed investors. Hedge funds have underperformed the Standard & Poor’s 500-stock index for the last five years, a metric that pension funds frequently cite as a comparison. In 2013, for example, the average hedge fund returned just 9.1 percent, according to the data firm HFR. That compares with a 32.4 percent increase in the S.&P. 500.

Calpers said it paid $135 million in hedge fund fees over the financial year that ended on June 30. The hedge fund investments returned just 7.1 percent, adding 0.4 percent to the firm’s total returns. For its hedge fund investments to have a material impact, Calpers would have to increase its hedge fund investments to at least 10 percent of its total portfolio, which was not a feasible option, according to Joe DeAnda, a spokesman for Calpers.[emphasis added]

There has been a movement over the past several decades to try to use pension fund money—that’s deferred wages of workers, not a gift—as a lever to shape a better economy. To date the victories have been quite modest.

However, the financial crisis made a lot of pension funds perk up—these funds lost hundreds of billions of dollars because of the Wall Street greed, money that can’t be recouped (because of the lost investment opportunity) and means retirees will always be playing catch up.

Let’s see if this causes more funds to dump hedge funds—or at least force a change in the absolute “2 and 20” ripoff fee scheme.

Originally posted to Tasini on Mon Sep 15, 2014 at 06:10 PM PDT.