During the past few months, we have posted a few words here on the quandary that is hedge funds. One such effort was titled “The Hedge-Fund Manager Dilemma,” and it explored the public’s fascination with the hedge-fund crowd. The next, “Why Investors Love Hedge Funds,” looked at why, despite stunning underperformance during the past decade, so much money was still flowing to the hedge funds.
Now, we are seeing early signs that some institutional investors are losing patience. Case in point: California Public Employees’ Retirement System. The Wall Street Journal noted that the pension fund is looking to reduce hedge-fund holdings by as much as 40 percent. “Public pensions from California to Ohio are backing away from hedge funds because of concerns about high fees and lackluster returns.”
Although this might be a rational response to issues of costs and performance, I would hasten to add that this is only anecdotal evidence. When we look at data such as money flows, it suggests hedge funds are continuing to pull in cash at an astounding pace. The hedge-fund-industrial complex now commands more than $3 trillion in assets. That is up from $2.04 trillion in 2012, and a mere $118 billion in 1997.
Calpers has a reputation for being a thought leader in the institutional-investment world. I have spoken with various pension funds and foundations over the past few years, and while the issue of hedge funds is under discussion, there is no consensus. Based on what various folks in the U.S. and Europe say, there still is great interest in hedge funds. Many investors are more than willing to forsake beta (returns that match the market) in the mad pursuit of alpha (above-market returns).
Still, this looks like it might be the start of something interesting. Continues here