Calpers, as the pension is known, said hedge fund fees should be based on long-term rather than short-range performance. Under the current system a hedge fund manager gets paid yearly, generally taking 20 percent of any gains he makes. If he posts strong performance one year followed by losses the next, he may still obtain hundreds of millions of dollars in fees at the end of two years, while investors break even or even lose money.
“We are so much more of their business now and with the way the market is, we think it’s time for us to be able to get better terms and conditions,” Calpers spokeswoman Pat Macht said.
Hedge funds tumbled 19 percent on average in 2008, the worst year on record and only the second time the industry has posted an annual loss, according to Chicago-based Hedge Fund Research Inc., which began tracking returns in 1990. Clients withdrew about $250 billion last year, a number that would have been higher if not for the record number of funds that limited withdrawals.
Most hedge funds must recoup last year’s losses before they can resume collecting fees on investment gains, usually a cut of 20 percent. Managers also typically take a fee equal to 2 percent of client assets under management.
Making Money
Against this backdrop, hedge funds are making money again, with average performance up 1 percent through March 25, according to a daily index published by Hedge Fund Research.
“Hedge fund managers are expected to exhibit the same sound approach to business management they expect from the companies in which they invest,” Kurt Silberstein, a Calpers’ senior portfolio manager said in a statement. “This restructuring effort is about building more stable, long-term relationships that also benefit hedge fund managers. It’s in our interest to get the best possible return on investment for our members, but it’s in the managers’ interest to be more closely aligned with Calpers in building stronger, more stable relationships.”
Calpers, with $173.8 billion in assets as of March 26, lost 26.6 percent after costs between July 1 and Jan. 31, according to its most recent investment activity report. Calpers, which provides pension and health benefits to 1.6 million government workers, retirees and their families, reached a record high of $260 billion in October 2007.
To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net
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