5/20/2017 Pensionschemesstayloyaltohedgefunds

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Pensions Industry

Pension schemes stay loyal to hedge funds

New research shows there is more retirement money than ever in the asset class
FTfm

Calstrs, which manages $188bn of assets for teachers in California, plans to increase its hedge fund exposure signicantly

JULY 24, 2016 by: Aliya Ram

AlmosttwoyearshavepassedsincethelargestpublicpensionfundintheUS,theCaliforniaPensionEmployees
RetirementSystem,rockedtheassetmanagementindustrybypullingitsinvestmentsfromhedgefunds.
Thedecisionpromptedanumberofhighprofilecopycatmoves,mostrecentlybyNewYorkCityspensionfund,
whichinAprilvotedtodivestits$1.7bnstakeintheassetclass.
Pensionschemesholdmorethan$800bnofthe$3.1tninhedgefundsglobally,andsuchprominentwithdrawals
haveraisedtheprospectofaruinousdominoeffectforanindustrythatisalreadyfacingitsworstoutflowssincethe
financialcrisis.
ButdespiteCalperswithdrawalfromhedgefunds,andtheensuingdebateaboutcomplexity,highfeesandpoor
returnsacrossthesector,newresearchshowsthereismoreretirementmoneythaneverinhedgefundcoffers.
AccordingtoPreqin,thedataprovider,therewere1,155pensionschemesgloballyinvestingacollective$839bnin
hedgefundsattheendofMay.
InDecember2013,shortlybeforetheCalpersdeparturedecision,therewere1,017pensionschemesinvestedin
hedgefunds,andthesizeoftheircombinedinvestmentswas16percentlowerat$721bn.
Thedataalsoshowthatforthefirsttimethisyear,moreretirementfundsareinvestingasumgreaterthan$1bn
withhedgefunds,insteadofcuttingback.
Calstrs,whichmanages$188bnofassetsforteachersinCalifornia,isoneofthebigpensionschemesbehindthis
trend.IncontrastwithitsneighbourCalpers,Calstrsplanstoincreaseitshedgefundexposuresignificantly,from1per
centto5percentby2020.*

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5/20/2017 Pensionschemesstayloyaltohedgefunds

ChristopherAilman,chiefinvestmentofficeratCalstrs,blamestheretreatbyothersonthepensionschemesthat
boughtintohedgefundsseveralyearsagowithmisguidedexpectations.
Alotofthepeoplewhorushedintohedgefunds,rushedinin2004and2005,hesays.Theyblendedalotoftypes
andtheydidntlikeit.Alotofthepeoplegettingoutnowwerelookingforoutsizedreturns.
CalstrsisonlyamileawayfromCalpers,ontheoppositeshoreoftheSacramentoRiverinthenorthofthestate,and
MrAilmansreferenceisonlythinlydisguised.Calperswasoneoftheearliestinvestorsinhedgefundsin2002,and
hadasprawlingexposureof$4bninmorethan24hedgefunds.
MrAilmansaystheideaistohedgeotherinvestments,mitigateriskthroughasmallnumberofcloselyscrutinised
funds,andnegotiatehardonfees.

Wearenegotiatingmuchlower[fee]modelsthan2percentofassetsand20percentofreturns,hesaysofthe
traditionalhedgefundchargingstructure.Wehaveverymuchfound[fundmanagers]opentobespokeagreements
becausetheyrecognisethatwearecomingintotheindustrywhenothersarecomingout.
TheregentsoftheUniversityofCaliforniaschemeandtheStateofWisconsinInvestmentBoardalsoincreasedtheir
hedgefundallocationsby$1.2bninthepastyear.

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5/20/2017 Pensionschemesstayloyaltohedgefunds

Morethanhalfofprivatesectorpensionfundsarebuildingtheirexposure.TheUSbasedpensionfundforMars,the
foodgroup,hasincreaseditshedgefundinvestmentsfrom14percentto24percent,whilethepensionfundsattached
toBoeing,theaircraftmaker,andDelta,theairline,havegrowntheirinvestmentsby$2.4bnand$1.7bnrespectively.
Allthreedeclinedtocomment.

Getty

Theyareusinghedgefundsasawayofcuttingriskanddiversifyingtheirportfolios,saysAmyBensted,Preqins
headofhedgefundproducts.
TheSanFranciscoEmployeesRetirementSystem,theStateUniversitiesRetirementSystemofIllinois,theCityof
OmahaPoliceandFireRetirementSystemandtheLondonboroughofWandsworthhaveallmadetheirfirst
investmentsintohedgefundssincelastyear.
Investorssaythatoutflowsfromhedgefundsandpoorreturnshaveincreasedtheirbargainingpoweronfees,while
consultantssaypensionfundsarecannierwhennegotiatingwithhedgefunds.
Thedynamichasbeenshiftingtowardstheinvestorsbecausetheyhavethedollars.Theyarenegotiatingmore,Ms
Benstedsays.
JohnBelgrove,headofinvestmentforEurope,theMiddleEastandAsiaatAonHewitt,theconsultancy,addsthat
increasedattentiontoactualinvestmentsmeansthatheadlinefigurescanbemisleading.Hedgefundisacatchall
forsomanydifferentkindsofstrategies,hesays.Thedefinitionisadistraction.
Wandsworthsassistantdirectoroffinance,PaulGuillioti,bearsoutthepoint.Heinsiststhatthecouncilslongonly
andunleveragedpositionswithCQSandOakHill,thehedgefundcompanies,shouldnotbeclassifiedashedgefund
exposures.

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5/20/2017 Pensionschemesstayloyaltohedgefunds

IvanZinn,chiefinvestmentofficeratAtalayaCapitalManagement,a$2bncreditorientatedhedgefund,also
believesthatmoreilliquidloanfundsshouldbeconsideredseparatelyfromlongshortportfolios.Inourexperience,
peoplearerotatingintopropercredit.[Pensionfundmoney]isgettingredistributedintootheralternativeassets.
Hedgefundshavebeendoggedbyoutflowsandportfolioclosuressincethefinancialcrisis,withdatafrom
WinterfloodSecurities,thebrokerage,showingassetsinthelistedsectorarenowathirdoftheirsizein2008.
Performancehasfallensharply,withanumberoflargeflagshipfundspostinglongstretchesofnegativereturns.
TonyGriffiths,senioranalystatCerulli,theresearchcompany,saysthegrowthofinvestmentalternativeswilldefine
whetherornothedgefundscankeepholdoftheirpensionassetsandattractnewmoney.
Thefirstportofcallhasbeentotrytokeeptheirinvestments,butatareducedcost,essentiallymakingupforany
shortfallinperformancebyconvincingmanagerstolowertheirfeesortorotateintocheaperproducts,hesays.
Thefirsthalfof2016hasbeentheworstforthesectorintermsofinvestmentperformancesincethefirstsixmonths
of2008,whenfundsexperiencedlossesof0.5percent.
Overall,hedgefundsareuparound1.3percentinthefirstsixmonthsofthisyear,underperformingtheS&P500,
whichisup2.6percentoverthatperiod.However,researchfromHedgeFundResearchshowsthatmanagementfees
havehardlyfallen:theindustrywideaveragefeeis1.5percent,comparedwith1.54percentin2008.
JagdeepSinghBachher,chiefinvestmentofficeroftheregentsoftheUniversityofCalifornia,whichoversees$91bn
ofassets,acknowledgesthefrustrationsinvestorshavewithpayinghedgefundmanagershighfeesformediocreor
poorperformance.
Thereturnshavenotbeenthere,ithasbeenachallengingenvironment.Itcertainlyraisesaquestionaboutfees,
MrBachhersays.
Hearguesthattherehasbeenadeeperchangeinthewaypensionschemesselecthedgefunds,especiallygivennew
pressurefrompensionerstounderstandwheretheirsavingsgo.
BothheandMrAilmansaytheirfundsregularlywalkawayfromhedgefundsthatdonotnegotiateonfees,though
hebelievesthatincentivesarestillwoefullymisaligned.
Butheaddsthathedgefundsstilloffersomeofthebestwaystomanagerisk.Youdontexpectthemtogetrichon
managementfees,hesays.Whatattractsustoamanageristhattheyareexploitinginefficienciesthatwewouldnt.
PFZWisunconvinced.TheDutchpensionfund,whichlastyearsaiditwillstopinvestinginhedgefunds,willnotput
moneybackin,evenifreturnsimprove.Thedivestmentfromhedgefundshadlesstodowithreturnsandmorewith
complexityandcost,saysJanWillemvanOostveen,itsheadoffinancialandinvestmentpolicy.
*ThisarticlehasbeenupdatedtoreflectadditionalinformationfromCalstrsonitshedgefundinvestments.

Printasinglecopyofthisarticleforpersonaluse.Contactusifyouwishtoprintmoretodistributetoothers.TheFinancialTimesLtd.

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5/20/2017 Pensionschemesstayloyaltohedgefunds

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