CalPERS: The Wrong Focus

The California Public Employees’ Retirement System (CalPERS) clearly had a rough go of it in the last 6 months. They lost a great deal of money. Now they seem intent on solving their “problems”. As this document (PDF) shows they are putting in place new rules for how they deal with and select hedge fund investments.

What are some of the big new rules? Well, CalPERS is worried about how much a hedge fund makes. Normal people might be worried first and foremost as to whether a fund returns ‘after fee’ positive performance or perhaps be concerned with the trading strategy employed, but CalPERS is worried about appearances. Clearly, CalPERS is only worried about politics. Does anyone think the great money earners in this world ask the questions CalPERS asks first? Of course not.

I would love to a list of the hedge funds and strategies CalPERS lost money in over the last 6 months. That would tell us a ton about the brain power in charge of all of those pension account monies.

PS. The “confidential” part is great. This is the freaking government!

11 thoughts on “CalPERS: The Wrong Focus

  1. It’s interesting what they say here when talking about redemptions:

    “This turns hedge fund investing from a matter of assessing investment, strategy, and manager-related risks to a matter of “game theory”– a game that rarely benefits
    investors or managers.”

    So they understand the game theory nature of the markets, but then in the next paragraph they talk about how they want to avoid it. Now if they understand the nature of something then why would they not seek out money managers that also understand that nature and that trade in such a way that exploits and profits from it? Why are they running away from the basic nature of the market?

  2. And then they seem to think that if the hedge fund managers set up separate funds just for their money then they will somehow be protecting themselves from the game-theory nature of the market. That’s just bizarre.

  3. Good on CalPERS for trying to bring some common sense to an out-of-whack incentive structure. These “government workers” are having to use their “brain power” to fill the void left by a lack of common sense regulation.

  4. I can’t believe I actually wasted my time reading that document. But I wanted to see what exactly it was you were reacting to. From what I can gather from your comments you think Calpers is stupid(?) for attempting to align their interest with their money manager’s?
    I review every statement you post of trend followers returns. None of them make money all the time. Thus to question a fee structure that would make money for a money manager when the investor loses money make sense to me.
    I’m beginning to think that if there is any tie to a government it automaticly sets you into the complain mode.
    I believe that trend following is the best way to invest. But I don’t care how anyone else invests and I question why you do. What is your point? What is the point of your exitence? I’m through wasting my time with you. Goodbye.

  5. I think the people who run CalPERS are lost – correct. Like you they are worried about “fees” instead of being worried about performance and strategy. Their actions make absolutely no sense. If a manager can make you after fee performance, I repeat after fee, of for example 20%+ — why is anyone whining about fees? On a base human level it smells of petty jealousy. Now if CalPERS selected idiot managers with bad strategy and now want to blame fees instead of their own ineptness — ok I get it.

  6. Michael, I understand your point – I just think you’re wrong. I didn’t see anything in the memo complaining about the amount of fees. CalPERS is trying to align their managers’ incentives with theirs and tying a fee schedule to long-term performance instead of short term. Seems like sound reasoning to me.

  7. US commodity trend funds find pensions elusive

    By Barani Krishnan

    NEW YORK (Reuters) – Trend-following fund managers in the United States aim to reel in bigger clients after placing winning bets on falling commodity prices, but conservative pension groups like Calpers and their advisers said on Wednesday they aren’t biting.

    High management fees of up to 6 percent a year and another 20 percent on profit is one reason why such fund managers — who buy when markets are up and sell when they are down — are disliked by those advising pensions, endowments and other institutional funds.

    Another thing working against these trend-followers is historical data showing positive returns for passive “long-only” investors in commodities, who buy and hold futures over extensive time periods regardless of market swings.

    Trend-following fund managers — also known as Commodity Trading Advisers or managed futures funds — are active money managers who will abort a long, or bullish position, for a short, or bearish bet, just to capture market momentum.

    These fund managers trade in financial futures like bonds, stock indexes and currencies, apart from energy, metals and agricultural futures. Their clients are often retail investors who put between $1 million and $5 million in trend-following accounts.

    “If you’re talking about commodities exposure for institutions, our approach would be really something very broad-based and passive,” said Michael Schlachter, managing director at Wilshire Associates, a global investment advisory which advises Calpers.

    “The actively managed portfolios charge ridiculous fees for commodity assets. Who wants to pay a 6 percent base fee when the active manager may also be long commodities most of the time, something the client can do passively?”

    Calpers, or the California Public Employees’ Retirement System, is the largest U.S. pensions fund, with total assets of $170 billion. It had $1.1 billion passively invested in the S&P GSCI , a long-only commodity index, in June, before a crash in oil, metals and grains prices took the value of that down to $586 million by the end of last year.

    In December, Calpers said it had appointed three commodities consultants, including Wilshire, to boost its inflation-linked asset class, which lost 3 percent in 2008. Calpers told Reuters then that it was open to exploring commodities exposure outside of the S&P GSCI, including long/short strategies that helped some trend-following funds post returns up to 75 percent last year.

    But Calpers spokesman Clark McKinley told Reuters the fund was not evaluating any trend-following commodity strategies. “We are still tracking this index,” he said, referring to the S&P GSCI.

    Schlachter, the Wilshire managing director, declined to discuss Calpers or any particular client. But he said Wilshire had the same advice to all institutions invested in commodities for diversification: Do not chase short-term trends.

    And while the firm was not in the habit of forecasting market direction, Schlachter said: “I’d be shocked if commodity prices didn’t rebound very, very rapidly to levels we saw last year, once we get back into a strong economy.”

    Ben Rotenberg, director at California’s Cliffwater LLC, another Calpers consultant, said although long-only commodity indexes had plummeted in value since June, there was no certainty they had lost their sway with clients.

    “I don’t know if that’s necessarily the case. I think its more of the asset class as a whole that’s suffered,” he said.

    Still, some trend-following managers are hopeful of stealing some market share from long-only indexes that have monopolized the institutional business in commodities.

    “We’ve met dozens of new potential clients, from state retirement systems to university endowments and family offices, and we’ve had very encouraging response,” said Marc Malek at Conquest Capital, a managed futures firm in New York whose two trend following funds returned 45 and 52 percent last year. (Editing by Marguerita Choy)

    Copyright 2009 Reuters

  8. I love the term “Risk Managed Absolute Return Strategies”. Do they measure managers’ results on limiting risk or on absolute returns? Or, does is the meaning of this term clear to everyone but me?

    PS I think you’re being unfair criticizing their wish for confidentiality just because they’re “government”. They’re talking about negotiating fees. My state open meetings act allows some exceptions for discussions of negotiating strategy because if one party is forced to negotiate in public, that party will be at a disadvantage and the taxpayers will end up paying more. Also, an investor as big as CalPERS has to be concerned about front running.

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