California Public Employees' Retirement System is taking the ax to its $5.3 billion hedge fund portfolio, with a goal of halving its allocation by September, Pensions & Investments reported this week.
The $290 billion pension fund's private equity program, already the subject of cuts, also faces reductions, P&I said.
CalPERS, which has been investing in hedge funds for nearly a quarter century, is cutting back its allocation even as the hedge fund program is under review with no decision about its future expected until the third quarter, P&I reported.
P&I based its story on multiple, unnamed sources who, the newspaper said, were familiar with the pension plan's operations. Neither Curtis Ishii, a senior investment officer for fixed income who is conducting the hedge fund program review, nor Egidio Robertiello, CalPERS' senior portfolio manager for absolute-return strategies, responded to requests for comment, P&I said.
Sources told P&I that the CalPERS investment committee had learned of the reduction during March and April, and that its 13 hedge fund managers were told in the past several weeks. Three hedge fund managers are to be terminated, and the remaining 10 will see their allocations cut.
By September, the sources said, the hedge fund program will be reduced to around $2.5 billion.
As well, the hedge fund-of-funds program is being reduced to two funds from five, according to the sources. Robertiello had already terminated four other hedge fund-of-funds managers during his nearly two years at CalPERS.
The fund-of-funds segment, which has been a particular drag on performance, eventually will be cut to 15% to 20% of the portfolio from about 30%, the sources said.
Shift of Focus
P&I was unable to uncover why Ishii had decided to reduce allocations while the program review was under way. The hedge fund program had underperformed in the past, but was improving under Robertiello, it said.
The hedge fund portfolio returned 9.2% for the year ended Dec. 31, compared with the CalPERS custom hedge fund benchmark of 5.3%, according to CalPERS statistics. The custom benchmark is the one-year U.S. Treasury note plus 5%.
For the three-year period, the hedge fund portfolio returned an annualized 3.3%. vs. 5.4% for the benchmark. For five years, the portfolio returned an annualized 6.2% and the benchmark 5.6%.
The hedge fund program over the 10 years ended Dec. 31 returned an annualized 4.9%, compared with the benchmark's 7.3% return.
