The nations largest public employee pension fund, Californias Public Employees’ Retirement System (CALPERS) announced that it is ending its investments in hedge funds. The move comes in the midst of debate among some large institutional investors as to the value offered by hedge fund investment versus alternative, more liquid funds. The impetus for exiting from hedge funds ranges from a desire to reduce high fees to the benefit of enhanced liquidity. Are liquid alts the next big institutional investment?
A $4 Billion Dollar Exit
While the CALPERS total fund value is estimated at $298 billion, the $4 billion hedge fund stake may not seem particularly significant; however, of greater note is whether the CALPERS move will encourage other pension and endowment investors to do the same and thereby initiate a trend.
Fund Fees a Factor
According to CALPERS own figures, the pension fund paid about $135 million in hedge fund fees for fiscal year ending June 30, 2014. Generally, hedge fund fees include a 20 percent performance fee in addition to a 2 percent management fee. By contrast, many alternative mutual funds have fees of less than 1.8 percent, and hedge fund managers may be coming under increasing pressure to justify their higher fees.
Liquid Alt Advocates
Bob Rice, managing partner at Tangent Capital, cites several factors motivating the shift to liquid alternatives, known as liquid alts:
All the early studies say the liquid alts perform as well or nearly as well as hedge funds, and whatever performance lag there is can simply be seen as a premium for liquidity, lower cost, transparency, simplicity and regulatory safeguards.
That opinion was seconded by Rick Lake of Lake Partners Inc., another proponent of liquid alts:
Lower costs and simplicity are hallmarks of liquid alternatives, compared to hedge funds, and that is why institutional use of liquid alternatives is growing
How Liquid Alts Differ
As the name implies, liquid alts are an alternative investment as are hedge funds but are differentiated by a limited range of investment strategies utilizing mutual funds, ETFs and closed-end funds. The common denominator among all liquid alts is that they allow daily liquidity. Also known as 40 Act Funds, their history goes back to 1940 when the funds were created by an act of Congress. According to Morningstar, Inc., 465 mutual funds are categorized as alternative strategy mutual funds, which together hold $161.5 billion in assets.
The Everyman Alternative Fund
While hedge fund investors need to be accredited investors who can qualify for participation based on net worth and income thresholds, liquid alt mutual funds have no such income requirements and, therefore, are accessible via stock exchanges to the average investor.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI
