LA Fire and Police mulls eliminating hedge funds

The $13.2bn pension also is considering slightly cutting its 10% private equity allocation. The pension is concerned about performance and illiquidity.

The Los Angeles Fire and Police Pensions system is considering completely eliminating its 5 percent allocation to absolute return, and cutting its private equity target by 1 percent.

The system, which has about $13.2 billion in assets, is contemplating halting investments in hedge funds because of illiquidity, and the performance of the asset class over the past few years.

“Hedge funds are among the least liquid of asset classes, and liquidity was a major concern for many institutional investors during the market turmoil of 2008,” the pension said in meeting documents this week. “Also, hedge funds are a very expensive asset class. The board’s hedge fund managers, representing a little more than 4 percent (actual) of the fund, receive almost 21 percent of total investment management fees paid.”

Hedge funds have ceased being “return generators” and are now often marketed as “diversifiers, and recommended for their ability to reduce volatility and portfolio risk”, pension documents said.

Pension staff and general consultant RV Kuhns will work on allocation issues and present a plan to the pension board in November, according to the pension's general manager Michael Perez. RV Kuhns, which completed a portfolio review and asset allocation study, is recommending the pension increase its exposure to absolute return from 5 percent to 8 percent.

LA Fire and Police originally took funds from the fixed income asset class in 2007 to fund newly hired hedge fund managers. “Fixed income outperformed hedge funds in 2008 (-3.98 percent vs. -17.18 percent) and 2009 (17.93 percent vs. 11.11 percent). Had the funds been left in fixed income, the fund’s returns over the past two calendar years would have been greater.”

The pension is ramping up allocations to emerging markets equities and broad international equity and creating a new asset class, Commodities – Energy, with a 5 percent target.