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Calpers Takes a Major Swipe at the Hedge Fund Industry

The California Public Employees’ Retirement System just took a major swipe at hedge funds as they decided to eliminate all hedge funds and fund of fund strategies from their allocations.  They don’t cite performance as the concern despite a poor run in recent years by the vast majority of hedge funds.  Instead, they cite costs and complexity (via Businessweek):

“We concluded that we would eliminate the hedge fund program in order to reduce the complexity, reduce the costs in the program, particularly in relation to our view that given the scale of Calpers, we would not be able to scale a hedge fund program to a size that would really move the needle,”

It’s probably a good move.  The opaqueness of many funds and the high fees make them poor additions to public employment programs where fund administrators need to be much more cognizant of any potential conflicts.

More interestingly, this is another big blow to high fee fund managers.  The days of being able to charge 2 & 20 are dying out.  My general guidance on any form of active management is to avoid any fund with a fee structure over 0.5%.  I make an exception on rare occasion for higher fee funds, but that’s a pretty good rule of thumb in most cases.  And that’s on the high side….