CALPERS Cuts The Cord On Hedge Funds

The largest public retirement fund (California State Public Pension) also known as CALPERS, is going to completely remove hedge funds in their portfolio over the coming year.  While this was telegraphed over the past several months, most people thought that the reduction was going to be less than 40% of the total invested, not a complete exit from the space.  We have continued to rail against hedge funds and other high fee, complex products over the years, so we think the change is great news for public employees in California.  Here is an excerpt from their press release:

“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals,” said Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “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 ARS program is no longer warranted.”

Translation:  we are getting out of hedge funds because the only people that seem to make money with them are the managers.  

It’s funny because many wealthy investors that we come across have hedge funds because they believe that these managers somehow have the “secret sauce” for investment returns.  In addition, when they see all of their wealthy friends using them, they figure it must be the right thing to do.  It will be interesting to see if this move by CALPERS makes investors rethink their strategy.

Trying To Beat The Market? Not Much Has Changed

If you’ve been invested in the stock market the last five years, congratulations.  You’ve made the most important investment decision…how to allocate your assets (hopefully you’ve had a healthy percentage in stocks).  That decision is by far the most influential decision on portfolio performance, so getting the allocation mix right is paramount.  One of the next decisions you need to make is how to invest in each portfolio asset class (stocks, bonds, etc).  It can be done by purchasing individual securities or through mutual funds.  If you are like millions of other Americans, mutual funds tend to be the product of choice.  It allows you instant diversification without much capital or labor of buying hundreds of securities.  

One of the key questions for purchasing funds is whether you should buy a fund that tries to beat the market or one that matches the market.  The majority of investors today are still trying to beat the market.  We think this is foolish since the evidence is so overwhelming.  Standard and Poors came out with their semi annual research piece on this topic.  The results seemed pretty conclusive to us:

SPIVA Mid-Year 2014 Scorecard

Over the last 5 years, we see that in almost every category, 80-90% of all funds fail to outperform their benchmark.  The costs associated with trying to outperform an index eventually catch up with these managers, making it difficult to experience sustained outperformance.  We have been beating this drum for 10 years (since the inception of our firm) and will continue to do so, as we believe it is a story investors need to hear.


What Happens After The Stock Market Has Huge Gains?

I can’t go a few days without someone asking me when the market is going to roll over.  It’s gone almost straight up for five years and that just isn’t sustainable, right?  As readers of this blog know, we prefer to take an evidenced based approach to investing portfolios, so I thought it was about time we look at the evidence.  The S&P 500 has generated an average annual return of 18.83% per year (including dividends) for the past five years, through June 30, 2014.  For my research, I looked at all rolling 5 year periods in the S&P 500 since 1926 that had returns greater than 20% per year.  In addition, I analyzed the 5 year return immediately following the 20%+ return in the market.  Here are some of the stats I found:


Rolling 5 year periods following 20%+ returns

All rolling 5 year periods periods













Std Dev



These results tell me two key points:

  • Market returns are on average lower (but still solidly positive) after 5 year periods where the market goes up greater than 20% per year
  • Just because the market has gone up a lot the last five years, it is no reason to abandon stocks

It’s human nature (especially after 2 bear markets in the last 14 years) to think that what goes up, must surely come down, but evidence tells us that this is not typically the case.  This is just another reason on why it is so important to let the facts drive our decision making.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.