Editor’s Letter – September 2014

Issue 97

Originally published in the September 2014 issue

That the largest US pension plan, CalPERS, will finally divest its remaining, relatively small, 1.3% hedge fund allocation, does not indicate a broader trend of pension funds exiting hedge funds. A quick google for “pension fund hedge fund/hedge fund consultant RFP/RFI” shows dozens of US pension funds, including CalPERS’s California siblings, are hungry for hedge funds. The second largest US public pension plan, CalSTRS, has even seeded activist fund Legion where manager, Ted White, is ex-CalPERS! Elsewhere in California, Orange County once attained textbook notoriety for Treasurer Robert Citron’s mishaps with interest rate swaps; now the county is seeking external expertise in the form of an uncorrelated macro manager. Fortune already reports other US state pension plans eyeing CalPERS’s hedge fund book!

Here in Europe, the largest pension fund, APG, reaffirmed its commitment to hedge funds last month when new CIO, Eduard van Gelderen, spoke to aiCIO. At 2013 year end APG had a “strategic” (i.e., structural or steady as opposed to tactical or temporary) 5% of its €288 billion assets in hedge funds – in percentage terms, roughly quadruple the CalPERS proportion. Yet APG’s 5% is slightly below the average weighting for pension funds that allocate to hedge funds, according to consultants Mercer. Their Asset Allocation Survey – European Institutional Marketplace Overview 2014 canvassed 1,200 pension plans in 14 countries, with €850 million of assets. Some 17% of the plans allocate an average 6% of their assets to hedge funds. Mercer clients have €35 billion in hedge funds, and Robert Howie tells The Hedge Fund Journal Mercer observes “a gradual increase in allocations to hedge funds and alternatives in general – and does not expect a retraction.” Howie’s pension fund clients continue to be attracted by “long-term net of fee returns on a par with equities, only with lower volatility.” He also argues “the opportunity set is good as markets are starting to reward security selection and deleveraging also creates opportunities.” Mercer is seeing growing interest in its delegated solutions and implemented consulting whereby clients are leaving the hedge fund allocation and/or selection decisions to Mercer.

This is echoed by Cardano’s chief investment officer, Keith Guthrie, who told The Hedge Fund Journal their clients often entrust the hedge fund bucket to Cardano as part of the overall package that makes up their fiduciary management model. Guthrie empathizes with CalPERS’s concerns over fees, but Cardano is engaging in open dialogue with hedge funds about “different ways to structure fees and align interests.” Cardano continues to use hedge funds in client portfolios as “some but not all have useful diversifying characteristics.” This view is underscored by consultant Towers Watson’s 2014 Global Alternatives Survey, which states “investors continue to view the hedge fund portfolio as a decorrelating and diversifying allocation.”