The Board of Administration of the California Public Employees' Retirement System (Calpers) has agreed to expand its hedge-fund program in a bid to increase returns.
Sean Harrigan, acting Chair of Calpers's investment committee, said: "Our move has come at the right time. We are able to offset losses that we would have otherwise sustained in the equity markets."
Calpers will make several changes to its hedge fund investing program to attract top managers. First, its hedge fund program will be renamed Absolute Return Strategies.
Second, Calpers will broaden the scope of investment styles and strategies by creating a pool of advisers, rather than rely on a single adviser. New York-based Blackstone Alternative Asset Management, Calpers's current adviser, is expected to be included in the new pool of advisers.
Third, Calpers will retain the State Street Bank International Fund Services system to ensure improved transparency, sound fund accounting, compliance and risk monitoring, and accurate reporting on the program.
Calpers, the largest public pension fund in the US with about US$133.8 billion of assets, began its hedge-fund program in April 2002. For the nine months ended 31 December, Calpers lost 0.9 per cent, net of fees, on its hedge-fund portfolio. For the fiscal year ended 30 June, Calpers posted a loss of 5.9 per cent on its overall investments.
Calpers has invested US$550 million - less than 1 per cent of its portfolio - with 13 hedge fund managers. The latest additions include a US$25 million investment to London-based Lansdowne Partners, a long/short European equity manager, and US$25 million with Miami-based Matador Capital Management, a bottom-up US equity hedge fund .
Calpers's board will consider an additional allocation to the program in the next several months.
A Greenwich Associates survey of 1032 institutional investors last year found that just 8 per cent of US public pension plans invest in hedge funds, compared with 11 per cent of corporate pension plans and 58 per cent of endowments and foundations.
Calpers' cautious approach is in contrast with that of some of the most successful hedge-fund investors. For example, Harvard University allocates 12 per cent of its US$19.5 billion endowment to hedge funds. The hedge-fund portfolio, which is invested with just four managers, returned 10.2 per cent in fiscal year 2002.
Yale University recently increased its allocation to hedge funds to 25 per cent from 22.5 per cent of its US$10.5 billion endowment. Over the past decade, the endowment's hedge-fund portfolio has produced annualised returns of 12.1 per cent.
Calpers' role as a fiduciary with responsibility for investing other people's money also imposes demands on fund managers. The pension fund is likely to demand more information about a hedge fund's portfolio than many managers may be willing to provide.
Calpers' investment policy follows a standard reporting format that all of the hedge funds in which it invests must follow.
It also sets limits on the amount of leverage, or borrowed money, that managers can use. The level may depend on the particular investment strategy, but in any case, is no more than 100 per cent of a fund's assets.
So far, Calpers' hedge fund investments have met the program's performance goals. The pension fund looks for hedge funds that are more consistently profitable than equity investments without bringing any added risk.
In terms of risk, Calpers is targeting a level of volatility for the hedge-fund program no greater than the expected volatility of its own, internally managed Wilshire 2500 Equity Index Fund. Moreover, it doesn't expect the value of its hedge-fund investments to decline by more than 10 per cent in any one month.
While its hedge-fund investments are well within these parameters, Calpers also wants to cut the costs of the program, which significantly dented its performance last year.