Hedge Fund

By Ed Mendel
July 18, 2016

The two big California public pension funds, CalPERS and CalSTRS, are going opposite ways on a controversial investment strategy, hedge funds, that is under fire from a powerful teachers union.

CalPERS announced two years ago that it was eliminating its $4 billion hedge fund program, citing their cost, complexity and one of its own investment principles: “Take risk only when we have a strong belief that we will be rewarded for it.”

CalSTRS adopted a “risk mitigation strategy” last November that will move 9 percent of its investment portfolio into long-term U.S. Treasury bonds and hedge funds with strategies designed to lose less value during recessions.

The different views of hedge funds is one of the biggest separations of investment strategy since CalSTRS, under legislation 34 years ago, took control of the teacher pension fund that had previously been managed by CalPERS.

Both funds have similar investment categories — stocks, bonds, private equity, real estate, liquidity, inflation — but with differing ratios and applications of the “ESG” screens (environmental, social and corporate governance) often used by large investors.

When the California State Teachers Retirement System became the manager after the legislation in 1982, the teacher pension fund was $10.9 billion. Now CalSTRS manages a $190 billion fund from its own new 13-story office tower.

It’s across the Sacramento River from the four-block complex where the California Public Employees Retirement System manages a fund worth $301 billion last week. With two of the largest and most impressive state buildings, the pension systems look prosperous.

But both are underfunded, with roughly 70 to 75 percent of the projected assets needed to pay future pensions. They are phasing in painful employer rate increases, while critics say overly optimistic earnings forecasts hide the need for even higher rate hikes.

Both funds have investments with money managers that follow the modern trend of institutional investors to “maximize shareholder value” (recently criticized here) by streamlining businesses, outsourcing jobs and cutting other costs.

As pension funds focus on cutting their own costs in what many expect to be a period of low investment earnings, the 1982 decision creating duplicate staffs and facilities for the two largest U.S. public pension funds may not look like a way to “maximize taxpayer value.”

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