Are hedge funds doomed?

Everything you need to know, in four paragraphs

Hedge funds
(Image credit: (AP Photo/Natacha Pisarenko))

The country's largest public pension has kicked hedge funds to the curb, said Mary Williams Walsh and Alexandra Stevenson at The New York Times. "Once the domain of the rich," hedge funds have lately gotten more and more of their investments from the pension funds of teachers, firefighters, and other public employees, which have looked to the industry to help close the growing gap between obligations to retirees and market returns. So Wall Street "took note" when the $300 billion California Public Employees' Retirement System (Cal-PERS) said last week it would move the $4 billion it had invested with hedge funds elsewhere, citing the funds' "high costs and complexity." It's not hard to read between the lines here, said Gretchen Morgenson at The New York Times. Not only are hedge funds "about as transparent as mud," but they have been abysmal market performers, "vastly" underperforming the S&P 500 index over the past one, three, and five years. Ultimately, CalPERS's move could be a "game changer" if other pensions follow its lead.

It's about time, said Michael Hiltzik at the Los Angeles Times. With any luck, the rest of the investing world will finally see that the emperor "has no clothes." It's a mystery why pensions continue to throw money at hedge funds: The industry last beat the U.S. stock market in 2008, and even then, the sector still lost 19 percent. Where hedge funds excel is "collecting fees." They billed CalPERS for $115 million in fees in a single year — nearly 10 percent of all the fees the pension paid, despite managing just 2 percent of the pension's assets. There's also the fact that CalPERS's beneficiaries "simply didn't need a hedge," said Barry Ritholtz at Bloomberg View. The whole point of hedge funds, after all, is in the name: They limit short-term risk. But when the point is to fund a retirement in 20 or 30 years? "Buying an expensive and complex hedge for that investment horizon is a waste of money."

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Sergio Hernandez is business editor of The Week's print edition. He has previously worked for The DailyProPublica, the Village Voice, and Gawker.