Subject: Calpers update - important...
From: "Daniel McHale" <[email-masked]>
To: "Eric Schwerin" <[email-masked]>, "Arlene Busch" <[email-masked]>, "Mike Mathis" <[email-masked]>, "Chuck Harple" <[email-masked]>, "Joan Peugh" <[email-masked]>, "Hunter Biden" <[email-masked]>
Date: Wed, 17 Sep 2014 12:35:09 -0400

This mirrors everything that I ever heard regarding CALPERs

HEDGE FUND MANAGERS REACT: CalPERS Was Just Terrible At Picking Hedge Funds
<http://www.businessinsider.com/author/julia-la-roche>

   - JULIA LA ROCHE <http://www.businessinsider.com/author/julia-la-roche>
   - <[email-masked]>  <aim:goim?screenname=JuliaLaRocheBI>
   <http://twitter.com/JuliaLaRoche>

   - SEP. 16, 2014, 12:59 PM
   - 5,737
   -
   <http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9#comments>
   13
   <http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9#comments>

   - FACEBOOK
   <https://www.facebook.com/sharer/sharer.php?u=http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9>
   - LINKEDIN
   <http://www.linkedin.com/shareArticle?mini=true&url=http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9&title=HEDGE%20FUND%20MANAGERS%20REACT:%20CalPERS%20Was%20Just%20Terrible%20At%20Picking%20Hedge%20Funds&summary=The%20hedge%20fund%20industry%20today%20is%20buzzing%20about...>
   - TWITTER
   <http://twitter.com/share?url=http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9&via=clusterstock&text=HEDGE%20FUND%20MANAGERS%20REACT:%20CalPERS%20Was%20Just%20Terrible%20At%20Picking%20Hedge%20Funds>
   - GOOGLE+
   <https://plus.google.com/share?url=http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9>
   - PRINT
   - EMAIL
   <http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9#>

Reuters/ Max Whittaker

The hedge fund industry today is buzzing about the nation's largest public
pension fund's decision to ditch all of its hedge fund investments.

On Monday, the California Public Employees’ Retirement System (CalPERS)
said it's dumping all of its hedge fund investments because of fees and
complexity.

"Hedge funds are certainly a viable strategy for some, but at the end of
the day, when judged against their complexity, cost, and the lack of
ability to scale at CalPERS’ size, the ARS program is no longer
warranted," Ted Eliopoulos, CalPERS Interim Chief Investment Officer said
in a statement.
<http://www.calpers.ca.gov/index.jsp?bc=%2Fabout%2Fnewsroom%2Fnews%2Feliminate-hedge-fund.xml#.VBdhGYI5RtM.twitter>

We've spoken to a few managers who run money for institutions like CalPERS.
The sentiment from them is that hedge funds as an asset class aren't the
problem. Instead, it's the particular hedge funds CalPERS chose to invest.
Investments were made largely based on the fee structure of the fund, not
on the potential alpha the fund could deliver. Those funds which reduced
their fees for CalPERS won the allocations.

"I think CalPERS is not a particularly good hedge fund investor," one
prominent hedge fund manager told Business Insider. He cited the pension
fund's lackluster annualized rate of return of 4.8% over the last ten years
<http://mobile.bloomberg.com/news/2014-09-15/calpers-to-exit-hedge-funds-citing-expenses-complexity.html>.
"I would redeem too."

He continued: "I think it's not hedge funds as an asset class. It's the
ones they invest in."

Another prominent hedge fund manager echoed that same sentiment.

"They got what they paid for since they only invested in managers who would
cut fees. So the best funds wouldn't do that, so they had a mediocre
portfolio."

In 2013, CalPERS spent $135 million on fees for a 7.1 percent return, according
to Bloomberg News.
<http://www.bloomberg.com/news/2014-09-16/calpers-pulls-all-4-billion-in-hedge-funds-citing-costs.html>

In general, there has been a backlash against fees hedge funds charge their
investors.

Fund managers are paid through a compensation structure commonly known as
the "2 and 20," which stands for a 2 percent management fee and a 20
percent performance fee charge. More specifically, "2 and 20" means a hedge
fund manager would charge investors 2 percent of total assets under
management and 20 percent of any profits.

Here is how the fee structure would be at a hedge fund with this structure
that manages $100 million: If this fund earned 20 percent in a year, the
fund would earn approximately $2.4 million in management fees (2 percent of
$120 million is $2.4 million). They would also earn $4 million in incentive
fees (20 percent of $20 million). Combining those two revenues, they would
earn a total of $6.4 million on the $20 million made leaving the investor a
net of $13.6 million.

This was a simple example as there can be lots of variations on these fees
depending on the fund.

Given the struggles of major macro hedge funds of last five years and the
strong performance of passive investments, it has become harder for many
hedge funds to justify the fees.

"Most hedge funds offer a questionable value proposition, but everybody
invests in the HOPE that they will get an upper quartile manager who
is worth the fees.  But by definition, at least half, probably ¾ of hedge
funds don’t offer value after fees," another hedge fund manager told us.

"[There] is a general backlash against hedge fund fees, again this is down
to the optics of equity performance currently versus hedge funds. In bad
times they will see, if they chose their managers carefully who do not just
mirror the S&P 500, that they will over perform across the general cycle,"
a macro fund manager told us.

Others think CalPERS move is symbolic of a market place that is confusing
the role of a hedge fund compared with that of a long-only mutual fund.

"This is more to do with CalPERS inability to meet its own performance
targets and thus reduce their deficit. They are actually taking more risk
and not less risk by lowering the diversification hedge funds can offer in
bad times," the macro fund manager told us.

"That being said, hedge funds themselves are tending to mirror the stock
market because they are under pressure by their investors (the same pension
funds) to produce equity like returns. These things tend to happen when
volatility in equities is low so people confuse the actual risk in owning
them."

Folks in the hedge fund space are certainly wondering if other pension
funds will follow suit. While CalPERS is the largest U.S. pension fund,
they only invested in 24 hedge funds and six fund-of-funds with a total
investment of $4 billion.

"They were tiny. 1.5% of the portfolio? They were clearly never believers."

Read more:
http://www.businessinsider.com/fund-managers-react-to-calpers-news-2014-9#ixzz3DajW3Dl