Every action has consequences. The CalPERS divestiture will have some unanticipated consequences as well. Here are a few.
Doors that May Have Closed
- Two and twenty was already on the rails and headed out of town before the CalPERS announcement. One of the industry’s worst kept secrets is that most large pension funds and institutional investors are already receiving a sweeter deal than the over-publicized two and twenty fee structure. None-the-less, media attention surrounding this redemption will serve to grease the rails.
- CalPERS may have revealed its soft underbelly. As the largest public sector pension fund, it was viewed to have held some sway over smaller pension fund managers. However, recent events have demonstrated that CalPERS leadership role was exaggerated, as evidenced by the legion of ebullient public pension fund managers who have spoken out in support of their hedge fund investments. For example, the California State Teachers’ Retirement System (CalSTRS) has affirmed its intent to stand by the hedge fund investments it has made. This suggests that rather than having been a leader, CalPERS has just been sonorous.
Doors that May Have Opened
- Public employee pension funds are highly political entities. The complexities of hedge fund investments are not well understood by rank and file public servants who rely on their pension fund for retirement income. However, they do understand is fees and pension fund managers have clearly demonstrated their understanding of the positive role hedge fund investments play in a comprehensive investment strategy. Politics and pensioners may incent fund managers to explore investments in smaller hedge funds with proven track records and more palatable fees. This bodes well for many of the smaller hedge funds.
- Hedge funds, in the main, are very likely to benefit from this ‘dust-up”. Publicity. Even bad publicity can be good. Hedge funds, now liberated from the decades old general solicitation ban, may see an organic bloom of interest from the retail market. Why? Because the CalPERS split with hedge funds piqued a broader interest in the industry, which may help hedge funds with retail ambitions. Broadly, hedge funds will benefit from the in-depth explanations public pension funds have been compelled to offer in support of their decision to remain invested in hedge funds.
Hedge fund managers need to recognize the doors of opportunity are opening, post CalPERS, and cross those thresholds with alacrity. Managers of smaller hedge funds have a unique opportunity to enhance market share in the public pension sector and they would be ill-advised to pass it by.
Managers of large and small funds would be well-advised to capitalize on the free and favorable publicity proffered by the heads of public pension funds. Large numbers are disavowing CalPERS strategy of divestiture. The cases they have made in support of their positions in hedge funds can be folded into any hedge fund’s retail strategy. Couple this with the rather cogent rationale for hedge fund investment, as articulated by so many public pension fund investors, and you have a powerful marketing tool at your disposal … for free.