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California Dumps the Hedge Funds

I have to confess that my promised weekly “good news” posts have been infrequent of late. This is partly due to a slowdown in posting, but mostly due to a dearth of good news, what with the U.S. about to get itself embroiled in another unwinnable war and all. But, here is some good news: CALPERS, the agency that administers the State of California's pension system, is going to exit all hedge funds.

The decision, after months of deliberation by the pension fund’s investment committee, comes as public pensions across the United States are beginning to assess their exposure to hedge funds. It is likely to reverberate across the investment community in the United States, where large investment funds look to Calpers as a model because of its size and the sophistication of its investments.

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A growing number of pension funds and institutional investors have expressed concern that the fees that hedge funds charge are too high. While there is a range, hedge funds typically follow a “2 and 20” model where investors pay management fees of 2 percent of the total assets under management and 20 percent of the profit.

via The New York Times

It must be good to be a hedge fund manager. When you fuck up, which they mostly do, based on historical performance, you make extremely good money. When you perform well (totally optional, of course) you make even better money. Meanwhile, unless you do extremely well, your client's get porked, but what of that?

Unfortunately, this good news comes too late and from too far away for the pensioners of Rhode Island, who face the prospect of a Democratic governor (Gina Raimondo) who, as state treasurer cut their benefits while she handed their pension money over to hedge funds while refusing to release details about those investmentsmlz to the people of Rhode Island. As Dean Baker has repeatedly pointed out, it is passing strange that people like Raimondo believe it is perfectly okay to break contracts with retired workers but would never think of breaking contracts with, say, the hedge fund managers they are enriching.

Sorry, I'm veering away from the good news aspect. The good news is that the CALPERS decision may, indeed, mark the beginning of a shift away from hedge funds by institutional investors, which would be a good thing for the people those institutions are supposed to serve, such as retirees, and a profound hit on the hedge funds, which rely on the vast sums and onerous terms they extract from such investors. There is nothing the hedge funds offer that a large fund with billions of assets like CALPERS has can't do for itself. There is nothing to prevent CALPERS from devising it's own investment strategies that hedge against losses. You actually don't need to pay someone a billion dollars a year to get reasonably good investment advice.

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