The hedge fund industry suffered a blow in September when first CalPERS and then Dutch mega-pension PMT announced in short order that they were divesting their hedge fund portfolios. Both argued that hedge funds were too complex and too expensive; in both cases, hedge funds accounted for less than five percent of either portfolio, but commanded a much higher proportion of overall fees.
Reaction to the move has been mixed. Some industry observers have argued that it makes very little difference to the market as a whole. Others have been wondering aloud whether this represents two dead canaries. Hedge fund titans Cliff Asness and Julian Robertson have both suggested that the field is now over-crowded with players who don’t really hedge anymore – effectively making them little more than expensive mutual funds.
But from a private equity point of view, what’s telling is where the pensions plan to re-allocate those dollars: both are looking at real assets and real estate with renewed interest.
CalPERS recently invested an additional $1.3 billion in commercial real estate, while PMT is going directly into the residential mortgage market. In conjunction with two other local funds, it has set up a special company named Munt Hypotheken to manage its mortgage investments; the idea is that this will allocate to the Dutch Mortgage Funding Company, which will invest in Dutch residential mortgages.
What they don’t seem to be doing is putting more money in private equity.
In PMT’s case, that’s not particularly surprising, given that for the first six months of 2014, its combined returns for alternatives, including private equity and infrastructure, were just 2.8 percent.
CalPERS has enjoyed better performance – but it has already been cutting its private equity allocation targets recently, citing the difficulty of finding enough investable opportunities. And while the Californian system has had some success in reducing the cost of doing private equity lately, its huge portfolio is still extremely complex to administer – leading some industry observers to speculate that private equity could even be next in the firing line after hedge funds.
Either way, both systems clearly believe they can find a better risk/return profile. GPs would do well to keep a close watch on the outcome.