CalPERS Pushes for Hedge Fund Changes

Specifically, the California Public Employees’ Retirement System (CalPERS) has announced that it intends to “restructure relationships with its hedge fund managers to achieve better alignment of interests, more control of its assets and enhanced transparency.”  

“We believe that investors and managers alike stand to benefit over the long term when interests are better aligned, asset controls are properly instituted, and transparency of risks and exposures is improved,” said Joseph Dear, CalPERS Chief Investment Officer. “We look forward to working with hedge fund managers in the coming months to strengthen these concepts and make hedge funds an even more effective asset management tool in the CalPERS portfolio.”

In a  press release , CalPERS note that in recent years, institutional investors have displaced wealthy individuals as the main clients of hedge funds, but that “the hedge fund marketplace has not evolved sufficiently to accommodate what institutional investors require to maximize long-term benefits for their beneficiaries.”   Instead of focusing on commingled accounts, CalPERS intends to move toward a focus on customized vehicles, managed accounts and other methods to improve control of its assets – an indication of how much perceptions about the space have changed in recent years (see  CalPERS Approves Doubling Hedge Fund Allocation ).

CalPERS said it also seeks the highest and most timely disclosure of information possible from funds in its $5.9 billion Risk Managed Absolute Returns Strategies (RMARS) Program , to better assess, measure and manage the risks within its portfolio.

The pension fund also said that fees should be based on long-term rather than short-term performance. CalPERS said that "the present model provides the possibility of a hedge fund manager realizing a 20 percent performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of the two years, but the investor may break even or even lose money."

CalPERS said that performance fees "should be based on long-term performance, and mechanisms such as delayed realizations and clawbacks can better align long-term interests of managers and investors."   The fund also stated that management fees should "better reflect the cost associated with generating performance and not be an invitation for asset-gathering."

"Hedge fund managers are expected to exhibit the same sound approach to business management they expect from the companies in which they invest," said Kurt Silberstein, Senior Portfolio Manager, CalPERS Global Equity. "This restructuring effort is about building more stable, long-term relationships that also benefit hedge fund managers. It's in our interest to get the best possible return on investment for our members, but it's in the managers' interest to be more closely aligned with CalPERS in building stronger, more stable relationships."

CalPERS is the nation's largest public pension fund with approximately $173 billion in market assets.