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CalPERS wants concessions from hedge fund managers

California's biggest pension fund is putting the squeeze on hedge funds that manage a chunk of the giant portfolio, seeking to cut better deals.

The $173-billion California Public Employees’ Retirement System today said it told more than two dozen hedge funds that it wants to "restructure relationships" to gain "better alignment of interests, more control of its assets and enhanced transparency."

CalPERS has a total of $5.9 billion invested with hedge fund managers.

"We can dictate terms that are more suitable" for a major investor, said Pat Macht, a spokeswoman for the Sacramento-based fund that provides retirement and healthcare benefits for 1.6 million government workers, retirees and their families.

The crash in global financial markets in the last year has wounded the hedge fund industry and has caused many investors to pull cash from the funds. The industry’s notoriously high fees have long been a source of irritation with clients, who now are in a stronger position to push back.

In a news release, CalPERS said the fees it pays fund managers "should be based on long-term rather than short-term performance."

As an example of what the pension giant sees as an inequity in the fee structure, it noted that "the present model provides the possibility of a hedge fund manager realizing a 20% performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of the two years, but the investor may break even or even lose money."

Hedge fund fees "should better reflect the cost associated with generating performance and not be an invitation for asset-gathering," CalPERS said.

The pension fund also wants "the most timely disclosure of information possible" about where its hedge fund managers have invested CalPERS' dollars. Hedge funds typically prefer to be secretive about what they're buying and selling, for fear of tipping off rival investors.

CalPERS’ move to tighten its control of hedge fund investments comes ahead of a planned asset allocation study aimed at repositioning the pension portfolio.

Amid the markets’ meltdown, the fund has lost about 32% of its value since hitting a high of $253 billion in June 2007.

-- Marc Lifsher

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