Billionaire investor Paul Singer has a message for the California Public Employees' Retirement System: Dumping your hedge funds makes no sense.
"We are certainly not in a position to be opining on the 'asset class' of hedge funds, or on any of the specific funds that were held or rejected by CalPERS, but we think the decision to abandon hedge funds altogether is off-base," Singer wrote in a recent letter to clients of his $25.4 billion Elliott Management Corp.
CalPERS, the largest public pension in the country, announced in September that it was axing most of its hedge funds, a $4 billion slate of a $300 billion portfolio, save for those that use a corporate activist strategy.
"Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost and the lack of ability to scale at CalPERS' size, the [hedge fund] program is no longer warranted," Ted Eliopoulos, CalPERS' interim chief investment officer, said at the time.
Singer took issue with that rationale.
On complexity, Singer wrote that it should be a positive.
"It is precisely complexity that provides the opportunity for certain managers to generate different patterns of returns than those available from securities, markets and styles that are accessible to anyone and everyone," the letter said.
The complexity issue also touches on transparency, another factor Singer said is overrated.
"We also never understood the discussions framed around full transparency. While nobody wants to invest in a black box, Elliott (and other funds) trade positions that could be harmed by public knowledge of their size, short-term direction or even their identity."
Singer also slammed CalPERs for its complaint about the relative high cost of hedge funds.
"We at Elliott do not understand manager selection criteria based on the level of fees rather than on the result that investors could reasonably expect after fees and expenses are taken into account," he wrote.
The broader point Singer makes is on the enduring value of hedge funds to diversify a portfolio.
"Current bond prices seem to create a modest performance comparator for some well-managed hedge funds. Moreover, stocks are priced to be consistent with bond prices, and we have a hard time envisioning double-digit annual stock index gains in the next few years," the letter said.
"Many hedge funds may have as much trouble in the next few years as institutional investors, but investors should be looking for the prospective survivors of the next rounds of real market turmoil."
Singer has reason to brag. His Elliott Associates LP fund has produced average annual returns of 13.9 percent net of fees since inception in February 1977. Three-month U.S. Treasury bills have gained 5.2 percent over the same period; the S&P 500 Index has increased 11.3 percent with dividends.
Hedge funds more broadly, however, have been underperforming. As a group, they've posted losses in six of the past 10 months and have returned just 2.92 percent year to date, according to data tracking firm Preqin.
"This was a CalPERS decision," a spokesman for the fund said in response to Singer's charges. " Hedge funds are certainly a viable option for many sophisticated investors. But at CalPERS' size it made it difficult to achieve meaningful results—results that moved the needle on total fund performance, which is all that matters at the end of the day. Scale is the primary factor in the decision."
CalPERs was not an Elliott client. A spokesman for Elliott did not respond to a request for further comment.