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Calpers Says Hedge-Fund Reforms Needed to End ‘Pay for Failure’

Date: Wednesday, April 29, 2009
Author: Jason Kelly and Eric Martin, Bloomberg

The investment chief of the California Public Employees’ Retirement System, the biggest U.S. pension fund, is pushing for lower hedge fund fees and a closer link between manager compensation and performance.

“We’re happy to pay fees when managers succeed on our behalf, but we don’t like to pay for failure,” Joseph Dear, Calpers’s recently appointed chief investment officer, said today in a Bloomberg Television interview.

Dear, who replaced Russell Read in January, spoke earlier on the topic during a panel discussion at the Milken Institute Global Conference in Beverly Hills, California.

“We’re a large hedge fund investor and we’ve been extremely distressed at the misalignment of interest,” Dear said. “Compensation schemes that pay off for the managers but not for the investor, lack of transparency, lack of control -- we want to change all those things.”

Calpers, based in Sacramento, California, has $175 billion in assets. The fund sent a memo to hedge-fund managers earlier this year asking for the ability to get some fees returned if a manager posts losses after a winning year. Hedge funds lost an average of 19 percent last year, according to Chicago-based Hedge Fund Research Inc.

Fee structures should be changed so that funds will earn rich profits only after delivering similar rewards to investors, Calpers said. Dear called for structures similar to those used by private-equity funds, whose managers typically earn 20 percent of profits after paying their so-called limited partners such as pension funds and endowments.


Speaking at the conference alongside New Jersey Investment Council Chairman Orin Kramer and hedge-fund managers including Marc Lasry of Avenue Capital, Dear echoed comments by Lasry, who said increased hedge fund regulation by federal agencies is inevitable.

“It’s not if, it’s when,” Lasry said. “We’re trying to push for regulation because I’d rather try and help figure out what it should be.”

Pension managers such as Dear will favor hedge funds that are regulated to guard against future losses, Lasry said. Transparency and performance will determine which hedge-funds survive, he said.

“If you’re producing, you’re going to get paid,” Lasry said. “And that’s how it should be. People who don’t line up with that system are not going to be in business anymore.”

Stephen Nesbitt, chief executive officer of pension fund adviser Cliffwater LLC in Los Angeles, said pension fund investment will lead to net inflows for hedge funds after investors spend much of this year assessing their losses from 2008.

“Institutional growth and the allocation to hedge funds will be significant,” Nesbitt said. “Pension plans, both public and private, need to take risk. People will start putting money into hedge funds in the fourth quarter.”

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.