Calpers to Exit Hedge Funds

The largest U.S. public pension plan is getting out of hedge funds as part of an effort to simplify its assets and reduce costs.

The California Public Employees' Retirement System said Monday it would shed its entire $4 billion investment in hedge funds over the next year.

The pension plan, known by its abbreviation Calpers, which manages investments and benefits for 1.6 million current and retired police officers, firefighters and other public employees, is a bellwether for investment trends at other public plans. Any shift it makes will likely influence others because of its size and history as an early adopter of alternatives to stocks and bonds.

Many public pension plans have been discussing how much risk to take in their portfolios as they face billions in unfunded obligations to workers.

"Hedge funds are certainly a viable strategy for some," said Ted Eliopoulos, interim chief investment officer at Calpers, in a statement. For Calpers, the program "doesn't merit a continued role" because of how complex and costly the funds can be, he said.

The exodus from hedge funds at Calpers follows a review of the portfolio that began in March, following the death of former chief investment officer Joseph Dear. Calpers officials began raising questions about whether hedge funds are too complicated or can effectively balance out poor-performing equities during a market crash, said people familiar with the situation.

Mr. Eliopoulos and his staff ultimately made the decision to pull out from a total of 24 hedge funds and six "funds of funds" that invest in a collection of hedge funds. The move was presented to Calpers' investment committee on Monday. The committee supported the recommendation. Existing staff who oversee the hedge-fund investments will be reassigned, Calpers said Monday.

The Wall Street Journal reported last month that Calpers was considering whether to retreat broadly from riskier assets, including hedge funds. Bloomberg News earlier Monday reported Calpers' decision to exit hedge funds.

Other pensions are also debating whether to avoid hedge funds altogether. Last week, the San Francisco City & County Employees Retirement System delayed for another 90 days a decision on whether to allocate 15% of its money to hedge funds. It is the second such delay this year.

The reconsideration of hedge funds as an investment option hasn't yet produced shifts inside all funds. Some public pensions say they are holding firm on their commitments or increasing their allocations as they worry about how stocks will perform in a future downturn. About half of the U.S. public pensions still have some sort of hedge fund investment, according to data tracker Preqin.

But hedge-fund allocations began dropping in the years following a 2011 peak, according to data compiled by the Wilshire Trust Universe Comparison Service, while the average amount committed to private equity, by comparison, is still climbing. Stocks and bonds are still the dominant investments for all public pensions.

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