BOSTON, Sept 16 (Reuters) - The California Public Employees Retirement System handed fellow U.S. pension funds a hefty club to beat down hedge fund fees and demand better returns this week when it voted to pull out of hedge funds entirely, investors said.
The biggest U.S. pension fund announced its plans to scrap its $4 billion hedge fund program on Monday, saying it was too costly and complicated. The move followed years of complaints by pension funds about high fees and a rate of return that has often lagged the stock market.
“Pension funds and everyone else would be remiss not to push on fees now,” said Brad Balter, Managing Partner of Balter Capital Management, which invests in hedge funds and is now offering its own liquid alternatives fund that mimic hedge fund performance with a lower fee structure.
Calpers, which manages some $300 billion in retirement funds for public workers, had been among the first big-name pension plans to put money into the loosely regulated hedge fund industry in 2002. At the time, hedge funds delivered out-sized double- or even triple- digit returns, and in exchange charged a 2 percent management fee plus 20 percent of profits.
The two-and-twenty fee structure, however, has lingered for longer than the mouth-watering returns. In 2014, hedge funds have so far gained only about 4 percent, lagging the broader market’s Standard & Poor’s 500 8.15 percent advance.
Joelle Mevi, who has long been arguing for lower fees, first as chief investment officer at New Mexico’s pension fund and now as executive director and CIO at the City of Fort Worth’s pension plan, agreed that Calpers’ move could be a wakeup call.
“Top hedge fund managers could see that this is a trend and it could strike fear in their hearts,” she said.
Hedge funds reached by Reuters declined to comment. But the industry has in the past rebuffed criticism over fees and performance by saying returns tend to outperform when markets fall. It has also pointed to strong demand: hedge funds which manage $3 trillion attracted $30.5 billion in new money during the second quarter alone.
Stephen Nesbitt, who runs consulting firm Cliffwater LLC and works with prominent pension funds, said hedge fund performance, like stock performance, can vary greatly - underscoring the need for investors to make careful choices.
“There are many investors who are happy with the results. It works for some and it has to do with implementation,” he said.
Investors pointed to William Ackman’s Pershing Square Capital Management, which has gained 31.2 percent so far this year on the back of a handful of activist plays.
“But for every Ackman in your portfolio, there are 20 other guys who eat up the fees,” Balter Capital’s Balter said. He said that the one-size fits all fee schedule has to replaced with more flexible and creative payment options that better reflect how well a manager is actually performing.
Some other big name pension funds had already quietly been negotiating with hedge fund managers on fees even before Calpers’ move.
Massachusetts, which invests roughly $5.6 billion with hedge funds, is pushing to move some of that money into separately managed accounts and may even invest, at a lower cost, in liquid alternative strategies..
“Moves by the big leading pensions like Calpers only reaffirms liquid alternatives are the wave of the future,” said Brad Alford, chief investment officer at Alpha Capital Management, which has put money into hedge funds and also now offers liquid alternative funds.
“Smart investors are no longer willing to pay these high fees for single digit returns,” Alford said. “High fees, little transparency, limited liquidity, light regulation plus hard to measure risk from leverage and derivatives are not a good investment solution.” (Additinal reporting by Megan Davies in New York and Nishant Kumar and Simon Jessop in London; Editing by Richard Valdmanis and Grant McCool)