Hedge Fund Investments Fall Out of Favor

Hedge funds have recently fallen out of favor in the asset management industry. Many in the financial sector believe the fee structure associated with hedge funds is excessive, and often these types of investments are risky and yield small profits.

Calpers, the largest public sector pension fund in America, recently announced it would no longer be using hedge fund portfolios. The California group cited that the break was a result of the complexity and large fees associated with hedge funds. The company had used hedge funds for its pension program for 12 years. While Calpers didn’t cite performance as a contributing factor, it’s difficult not to take it into consideration because the company announced just a few weeks prior that they only engaged in risk when they strongly believed they would be rewarded for their venture.

According to company reports, the Calpers’ hedge fund portfolio returned with a 7.1 percent interest earned in June 2013, which is lower than their return threshold of 7.5 percent and much lower than the 18.4 percent they reported for their entire investment fund. According to HFR, over that same period, hedge funds gained only five percent in the first half of 2013 and 1.58 percent in the first half of 2014.

Calpers is one of many pension programs to take action against hedge fund portfolios. Many have reduced or completely left hedge fund investments including the Los Angeles Fire and Police Pensions system, the Louisiana Firefighters’ Retirement system and the San Diego County Employees Retirement Association. Many more have privately signaled they will be leaving hedge fund investments largely because of their expensive and complex fee structures and because returns usually don’t justify the risk involved.

In a survey conducted by the Callan Investments Institute in September 2013, researchers found that the percentage of clients who pay performance based fees has dropped from more than 30 percent in 2011 to below 20 percent in 2014. The survey group included investment managers and fund sponsors with over $15 trillion in investment assets.

It has been speculated that clients are beginning to scrutinize fees from hedge funds; however, some investors will continue to take a chance on these investments. According to HSBC research, the top hedge fund performers in 2013 were SFP Value Realization Fund with an 82 percent return, Senvest Partners with a 79 percent return and Marlin Fund with a 77 percent return.

Many investment groups have tried to replicate these results; however, Calpers and other large investment pension schemes find it difficult to justify these types of large fees with minimal returns for the most part to their clients. Furthermore, the withdrawal of quantitative easing in the US will likely increase volatility in hedge fund’s performance for the next couple of years.

Large investment firms like Calpers, with over $300 billion in assets and over 1.6 million members, likely finds it difficult to increase hedge fund allocations for such a small profit considering the the high risk involved with these investments. The move by Calpers is the beginning of a significant trend reversal of investments in hedge funds, which had seen over $260 billion invested by pension trustees since 2008.


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