Hedge Fund Evacuation Due to Handwritten Buffett Note?

Calpers reduces its exposure to hedge funds by 40%. Fund managers all around the country are beginning to ask – who makes the money, the hedge fund manager or the pension fund?

Did Warren Buffett’s 12 word note set off a new trend for pension funds by convincing them to reduce their exposure to hedge funds?

Down and Out Hedge Funds Seek the Advice of Billionaire Warren Buffett

For a time the San Francisco Employees Retirement System thought about allocating 15% of its assets to hedge funds. This sparked a robust debate as you can imagine. Herb Meiberger, who made the argument that in the past hedge funds had blown up and were certainly not appropriate for the retirement funds of government employees, asked the advice of billionaire investor Warren Buffett, according to the Wall Street Journal report.

“I would not go with hedge funds – I would prefer index funds,” were the words that Warren Buffett shared with Meiberger when he sent him a handwritten note.

This argument started after the California Public Employees Retirement System, also known as Calpers, decided to reduce its exposure to hedge funds by 40%, we learn according to the Wall Street Journal report, and they have decided to take an approach that is considered being “back to basics.”

Performance has been the main problem.

Hedge Fund Returns Have Been Weak

Even though the stock market has been rising to new heights, the returns at hedge funds have been limp at best. All through the last seven years, the Los Angeles police and fire pensions have only gained a mere 2% return from their investment in hedge funds. But at the same time, the hedge funds take as much is 17% in fees. Investment managers are severely beginning to question the nature of their relationship with hedge funds since the funds themselves have made over eight times the return for their company as opposed to the pension fund.

“We were ready to move on,” said Ray Ciranna, the Los Angeles police and fire pension general fund manager.

There are hedge funds that have been accused of being strong vehicles to generate their managers’ performance fees, but few other returns. The advocates for hedge funds would make a counter argument that the point of the hedge fund is to deliver durable performance – specifically during the periods when a financial crisis is taking place.

During the 2008 stock market crisis, hedge funds generally did better – with their best performances in managed futures – but their most recent performance has been spotty at best. Activist investors are performing well, but many value managers and stock pickers have had a tough time in a market environment that critics are saying is solely driven by artificial stimulus.

Will the new movement become a full-blown trend?

“We are seeing a little moving away from hedge funds,” said the CEO of Commonfund Verne Sedlack. So far turning away from the hedge funds is “just on the margin” said the manager of investments for endowments, nonprofit groups and pensions.

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