In 2004, a number of Yale students disguised themselves as the “Harvard Pep Squad” and handed out red and white cards at a Harvard-Yale football game that they claimed would read “Go Harvard” crowd-wide when held up. Unfortunately for Harvard students, when they held the cards up, they instead formed a pattern that read “We Suck”, much to the amusement of the opposing fans.
But I digress.
Last month, CalPERS announced that it would eliminate its $4 billion hedge fund program. While the program, at just over 1 percent of CalPERS’ total assets, was certainly not central to its portfolio, Bloomberg’s Erik Schatzker offered a telling analogy, or two, on Bloomberg TV as to the symbolic nature of the announcement:
“CalPERS giving up hedge funds is like Harvard giving up football. … Hedge funds aren’t core to CalPERS, only $4 billion of CalPERS’ roughly $300 billion of assets, and many people aren’t going to miss those hedge funds when they’re gone, but it has symbolic value that you can’t understate.
Imagine if Harvard were to give up football. CalPERS is the establishment in the pension fund business. It’s the largest public pension fund business in America and, as a result, it’s a pacesetter. It was among the first pension funds to invest in hedge funds more than a decade ago, and what’s happening now is that CalPERS is like the little child in the Hans Christian Andersen tale telling the emperor he isn’t wearing any clothes. Because the dirty little secret is that hedge funds don’t make pension funds very much money.”
And, in the case of CalPERS, they haven’t of late. CalPERS’ overall 18.4 percent return during the 2013–14 fiscal year far outpaced the 7.1 percent return it received from hedge funds. As did most of CalPERS other asset classes, including real assets, which returned 13.4 percent over the same period.
What’s more, according to the Bloomberg TV segment, CalPERS was charged $135 million in fees for the management of those assets — assets that, at a 7.1 percent return for the fiscal year, only made $284 million.
CalPERS certainly did not have harsh words for its hedge fund managers in the statement announcing the end to the program. But, those managers posting a 7.1 percent return in a year when CalPERS as a whole returned 18.4 percent, its public equity returned 24.8 percent and even its fixed income portfolio returned 8.3 percent, isn’t too far from holding up a big sign that reads … well, you get the picture.
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Reg Clodfelter is a reporter with Institutional Real Estate, Inc.
