Does The Biggest Pension Plan Know Something You Don’t?

CalPERS, the largest US public pension fund at $300 billion+ just rocked the investment world by announcing it will eliminate its hedge fund program. With its money and clout CalPERS has access to the best investments anywhere and everyone wants them as a client.  Now they are saying no to hedge funds. Why? Is CalPERS trying to tell us something about investing?

What’s up here?

That’s right, the California Public Employees Retirement System, is eliminating its hedge fund investments “in effort to reduce complexity and costs in investment portfolio.” And there’s plenty of complexity and costs to reduce.

Let’s start with the opaque nature of hedge fund investing, the secrecy, the non-disclosure. It may sound alluring, but an intentional lack of transparency sounds all kinds of alarms. How can investors judge the suitability of a portfolio if it’s inside a black box?

Next is liquidity. Hedgies essentially say: “Give us your money, but don’t ask for it back,” hence the gates, lockup periods, and other perfectly legal restrictions they have on withdrawals.  You can easily find yourself paying short-term gains taxes on money you cannot access. Hmm.

Then there’s taxes. Almost all hedge funds generate short-term gains, so you only keep 55% of what you make (after top federal and state rates in MA).

And let’s not forget fees.  The traditional fee scheme is 2 and 20. That’s 2 percent annually, plus 20 percent of any profits. Great for them, but is it for you? With the first third or so of the overall return going to the hedge fund it’s hard to earn enough to make the remaining 2/3 worth something to the client. That’s like scaling a wall carrying a weighty bag of gold.  Good luck getting over the top with much of it!

Some of my best friends are hedgies

I should note that I know many hedge fund managers. They are smart, focused, well-intentioned people.  And almost all of them will tell you, “if you are an individual, don’t invest with us!”  Many wealthy people feel admission into a hedge fund is a badge of financial success, but to my eye it’s not the kind of club most individuals should aspire to. CalPERS, a huge institutional investor, apparently agrees.

Let’s get back to you

The ultimate question for you is “what precisely is in my investment portfolio and why is this good for ME?” We explore this question deeply with each new Osbon Capital client. We look at this from many angles, but at the top of the list are 1) a cost audit and 2) a tax drag audit.  We routinely find that investors are paying too much for what they don’t get.

No wonder we’re so confident that we can offer immediate improvement – simply ending the cost and tax waste provides a real performance boost. After that, we quickly get to the “you” of your investments: your goals, experiences, wishes, fears, plans, hopes and all other aspects that make you unique.  Then we start on your custom portfolio.

If you must

Still think hedge funds are great? Then consider being an owner rather than an fund investor.  Some of the largest hedge fund owner-operators are public companies –KKR, Apollo, Brevan Howard, Blackstone and others.  If you just can’t resist the idea of getting through the hedgie velvet rope, I’d suggest putting a small stake in the operators. Better be an owner than a client.

John Osbon – josbon@osboncapital.com