By Muskan Arora
The $190B University of California’s endowment and pension fund is divesting from hedge funds due to its inadequacy in providing risk protection.
During its July meeting, the board approved a plan to slash, for both the endowment and the pension plan, its 10% target allocation to its absolute-return portfolio, or hedge funds portfolio, re-allocating the budget to its public equities portfolio. UC Investments also hiked the pension plan’s public equities target allocation from 53% to 57% and its endowment’s public equities target from 40% to 50%.
Jagdeep Singh Bachher, UC’s chief investment officer, noted the plan’s hedge fund positions had weakened its overall performance by injecting risks during market tensions in 1999, 2008, and 2020.
In each of those three scenarios, hedge funds didn’t hedge us,” said Bachher to the board, during the July investment meeting. “They exposed us to the opposite kind of risk, which actually meant they hurt us.”
“Here’s the interesting thing: there’s always somebody outside of this room that performs better than we do,” he added. “That’s a fact of life. The reality, though, is we cannot be good at everything we propose we can do. Hedge funds is not one of the things we’re good at doing.”
The move certainly wasn’t unexpected as, during a meeting in 2023, Bachher disclosed plans to liquidate the hedge fund portfolio. The university began investing in hedge funds 20 years ago; however, the CIO has noted the bucket hasn’t been able to provide the hedge needed by the portfolio.
“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,” said Bachher.
Bachher, who was appointed CIO in 2014, suggested that if the plan had allocated to a combination of stocks and bonds over the past 20 years, UC would have avoided “all the drama and the illiquidity and all the high fees” and would still have had a comparable return.
“My only regret is not the fact that we haven’t invested in hedge funds, it’s that I am not a hedge fund manager,” he said, during this recent meeting.
Within the pension plan, the new investment policy also added a 1% target allocation to cash, which can be stretched to 5%. Additionally, it removed a 1.5% target allocation from emerging markets fixed income, hiked core fixed income targets from 13% to 14%, as well as increased high-yield fixed income to 3% from 2.5%.
Within the endowment, the new investment policy allows for a stretched allocation of up to 65% for public equity and up to 20% (from 12%) for real estate. The endowment’s allocation to cash was reduced to 0% from 1%. All other asset classes remained unchanged.
