Around the web

• Research  magazines revisit of Pioneering Portfolio Management. [here]
• BlackRock on 10 myths surrounding alternative investments .
• Gene Podkaminer of Callan on risk factors  in asset allocation.
• Andre Perold of Harvard and HighVista on asset allocation .
• Keith Ambatcheer on long-termism. (pension-oriented, but relevant here, too.)
• Andrew Ang of Columbia on asset allocation .
• NEPC on private equity, here and here .

Saturday, 20 September 2014

CalPERS Hedge-quake?

CalPERS recently announced its intention to divest from hedge funds. [CNBC report ] If the investment committees that EndowmentInvestor knows are any indication, the decision is generating a great deal discussion.

Should your endowment or foundation follow suit?

There are a number of reasons to be skeptical:

• CalPERS size doesnt make them right
• Size is even a hinderance—more $$$ (which CalPERS has to put to work) dilutes alpha
• CalPERS is sometimes a contrary indicator—two CIOs we know actually contend that a kneejerk response to do the opposite of CalPERS is a good default choice
• While divesting $4 billion sounds like a lot of money, it is too small to move the needle at CalPERS
• At some level, CalPERS rationale [discussed below] isnt really news—it is the result of known issues and a relatively-slow analysis process
• Your circumstances are not CalPERS circumstances

Nonetheless, CalPERS decision does highlight some important issues:

• Fees matter crucially
• Simple investing is a virtue (and HFs are complex)
• Many hedge funds are merely mid-beta products that dont offer a great deal of diversification when its really needed

What, then, to do?

• Scrutinize your hedge funds for banal, yet expensive, mid-beta products—then cut them
• Scrutinize your all-in hedge fund costs

• A huge portion of the anticipated hedge fund alpha may disappear to fees
• Consultant costs are real
• Each layer of fees, base or carry, is real and worth counting
• Consultant, staff, and board time is a cost