The California Public Employees’ Retirement System, the largest U.S. pension, invested for the first time in a hedge-fund startup, putting $100 million into a Toronto-based firm.
The deal with Breton Hill Capital, which invests in equities and currencies as well as commodity and financial futures, represents Calpers’ first foray into seed funding for a money manager, Brad Pacheco, a Calpers spokesman, said yesterday in a telephone interview.
Calpers, with $223.8 billion in assets, earned almost 21 percent on its investments in the 12 months through June, its largest gain in 14 years. The fund invests $5.3 billion, or 2.4 percent of its portfolio, in hedge funds, according to a statement.
“This is pretty unique,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors. “There is a significant opportunity for pension funds that have the right expertise and management to provide strong returns by doing this.”
Breton Hill principals had no comment on the Calpers investment, Ray Carroll, the fund’s chief investment officer, said in an e-mail.
Calpers began working with hedge funds in April 2002 and has an annualized return of almost 5.5 percent in that category, according to an Aug. 15 report by Craig Dandurand, who manages Calpers’ hedge fund portfolio. The S&P 500 index (SPX) gained 3.6 percent in the same period, Calpers spokesman Wayne Davis said in an e-mail.
New York Investment
The New York State Common Retirement Fund, the third- largest U.S. pension, provided $250 million in seed capital for an emerging-market hedge fund run by London-based Finisterre Capital LLP in January 2010.
“There’s been a very strong trend toward more pension funds investing in hedge funds and the average amount they invest is up sharply,” Steinbrugge said.
Pacheco said Calpers selected Breton Hill for its initial investment in a startup after an “extensive review” of the firm’s principals and investment process.
“Another key element in this review was determining that Breton Hill’s systems and infrastructure were well-prepared for institutional investment,” Pacheco said in an e-mail.
Let me commend CalPERS for having the brains and the guts to seed a Canadian hedge fund. I'm a firm believer in seeding hedge funds because if you do it right, it will pay off in droves. The problem in Canada is that apart from Ontario Teachers' Pension Plan, which has seeded Canadian hedge funds and fund of funds in Ontario, most of the large Canadian public pension plans are dominated by conservative board members who are basically clueless on hedge funds. Most these board members are dinosaurs stuck in the long-only era of the investment management world.
How do I know? Because I used to present to these board members and go head to head with them. I don't care how old they are, how many years of experience they have, when it comes to hedge funds most board members are ignorant fools who dismiss hedge funds as "risky investments" (as if there is no risk in long-only investments!). Don't get me wrong, I know that most hedge funds are mediocre, selling beta as alpha, but there are excellent funds out there and too many pensions are focused on brand names and not focusing enough on seeding the right managers.
When pensions invest in hedge funds, it's always "brand names" recommended by their brainless pension consultants. But did you know that the performance of most successful hedge funds peters out as their assets mushroom? Why? Because they become big, fat, lazy asset gatherers who collect 2 & 20 for turning on the lights. When you manage billions, that 2% management fee pays the salaries of a lot of young, hot, sexy, beautiful saleswomen who know how to bat their eyelashes, toss their hair, giggle at the right moment, show off their cleavage and pitch a fund to horned up, lonely pension managers at some silly hedge fund conference. The sales pitch of "uncorrelated alpha" is why so many institutions run by idiots are still horny for hedge funds.
I've seen so much utter nonsense in the investment world that I've got to get cracking on writing my book. It will make a lot of pension fund managers, fund managers, board members and pension fund lawyers extremely nervous but once I'm done exposing the nonsense I've seen and experienced, it will become an instant best seller and they'll make it into a sequel of the "Inside Job" (great documentary, saw it on the plane ride back from Greece; watch trailer below). There are a few "powerful people" (roll eyes, cough, cough!!!) at Canadian public pension funds who want to see me go away because it bothers them that a former senior pension fund analyst battling and beating progressive multiple sclerosis keeps exposing their dirty little pension secrets.
Tough luck, I'm never going away and will never be silenced. The great retirement heist continues under the radar and millions of workers are in for some serious disappointments in the future as they see their retirement age increase and benefits slashed. Most public pension plans are well managed, and I give credit where credit is due, but when I see CalPERS seeding a Canadian hedge fund, I rejoice because it's a slap in the face to many of the large Canadian public pension funds who are not doing what's in the best interest of their plan members and plan sponsors by seeding our own alpha talent.
Did you get that last comment? How is seeding a hedge fund in the best interest of plan sponsors and plan members? Isn't it risky? NO!!! If it's done properly, with the proper selection, proper terms, proper platform (managed account), proper supervision, proper liquidity, then pension funds will get high risk adjusted returns with reduced fees and they will build a long-term relationship with excellent alpha managers.
The arguments I hear against seeding Canadian hedge funds are "if they're that good why aren't Canadian public pension funds seeding them?" And my answer is simply "because they're stupid, risk-averse in the most ignorant way, and with few exceptions, they're rarely first movers." I'm not saying that all Canadian hedge funds are worth investing in or seeding. Most are terrible, but I know guys and gals with years of experience who know how to deliver true alpha but they can't get a dime from large Canadian public pension funds for political reasons or because it's "sexier" to fly first class over to London, New York, Chicago or anywhere else in the world and be wined and dined at fine restaurants by pretty saleswomen (or receive under the table bribes from unscrupulous fund managers with lots of money).
I've allocated to the best hedge funds in the world. Seen it all. There aren't a thousand George Soroses, Ken Griffins, Ray Dalios, Bruce Kovners, Steve Cohens, Alan Howards, Paul Tudor Jones out there but that's not the point of seeding hedge funds. You never know, you might land on the next great manager, but that's like winning the lottery. The point is that emerging managers are hungrier, performance driven, and they typically align their interests a lot better with those of pension fund managers, plan sponsors and members.
Given these volatile, difficult markets, it shocks me that more and more public pension funds are not hiring the right staff or partnering up with the right fund of funds to seed hedge funds. We have incredible, talented alpha managers in Canada but sadly, many go unnoticed and are struggling to raise seed capital. I urge more US funds to follow CalPERS' lead and come explore opportunities right here in Canada. Hell, I even urge US hedge funds to start seeding Canadian hedge funds. If you need help, just contact me (LKolivakis@gmail.com) as I already have a few top Canadian alpha managers that are worth seeding in highly liquid strategies (and some have secured funds from Canadian private investors).
Like I said, it's high time I get cracking on writing a book on the good, bad, and downright ugly things I've experienced and seen in the pension world. More than 700,000 people have visited my blog over the last three years but that's not enough. I want the world to know about the real "Inside Job" happening with their pension contributions. And to all the senior Canadian pension fund managers reading this comment, get cracking on seeding Canadian alpha talent. If you don't, US and European funds will beat you to it and they will embarrass you as they profit handsomely from these investments. And I'll have fun reporting every single time they do so.