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The $190bn manager of the University of California’s endowment and pension has divested from hedge funds as its chief investment officer lambasted the industry for failing to provide adequate risk protection.
UC Investments in a meeting on Tuesday approved a plan to reallocate its 10 per cent absolute return portfolio — or its investments in hedge funds — to public equities, finalising a wind-down that began five years ago.
Jagdeep Singh Bachher, chief investment officer of UC Investments, one of the largest institutional investors in the US, sharply criticised the industry in a recent meeting for not delivering for clients.
“Hedge funds are a fantastic business if you’re on Wall Street, and you can charge a great fee and then you can afford to buy all the art and the private jets and the amazing houses in the world,” he said.
He added that UC Investment’s hedge fund positions had undermined its overall performance by introducing risks during market upheavals in 1999, 2008 and 2020.
“In each of those three scenarios, hedge funds didn’t hedge us,” he said. “They exposed us to the opposite kind of risk, which actually meant they hurt us.”
The move underscores concerns among asset allocators about hedge fund investments that come with unstable returns and high fees that have ballooned in recent years.
The “pass-through” fee model has helped fuel multi-strategy funds, which charge investors for all of their expenses — from office rent to client entertainment. This is a break from the historic hedge fund model, which charged investors a 2 per cent management fee on assets.
Bachher said if the endowment’s hedge fund portfolio had instead been allocated to a combination of stocks and bonds over the past 20 years, it would have avoided “all the drama and the illiquidity and all the high fees” and still had comparable returns.
Multi-strategy hedge funds such as Millennium Management and Citadel have extended lock-up periods, making it harder for investors to retrieve their money quickly. Still, demand for these funds has remained high, with the best ones generally closed to new investors. Citadel’s annualised net return since the firm was founded is roughly 19.2 per cent, while Millennium’s is around 14 per cent.
Bachher said UC Investments decided to unwind its hedge fund portfolio in 2020 when the endowment adjusted its allocation target. The process, which “typically takes” 90 days, ended up lasting five years because of “the beauty of hedge funds”.
He added: “My only regret is not the fact that we haven’t invested in hedge funds, it’s that I’m not a hedge fund manager.”
“There are some that are phenomenal and have consistently been right, like Bill Ackman, TCI and a variety of other folks . . . but it’s kind of like there’s only one Warren Buffett out there, and there’s a few of the ones out there in the hedge fund universe as well,” he said.
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