The $180 billion California Public Employees’ Retirement System is hinting at a bold stroke: building its own hedge funds and running them in-house. Sacramento-based CalPERS, the biggest public pension fund in the U.S., sees the move as a potential way to attract high-end talent. But given the compensation gap between money management jobs in the public sector and the private sector (where hedge fund management can be among the best-paying occupations on the planet), CalPERS administrators will need to be creative to compete.
CalPERS would hire up-and-coming portfolio managers to develop hedge funds. They wouldn’t make hedge fund money, but they could build a track record that would allow them eventually to leave and start their own firms. CalPERS would get presumably profitable hedge funds without having to pay high fees; managers would get a good jumping-off point to private sector glory.
Such a scheme is not unheard of. Boston-based Harvard Management Co., which manages $29 billion in assets for the Harvard University endowment fund, over the years has developed almost 30 hedge fund managers who have then spun off from Harvard. They include Jack Meyer, who as CEO of HMC from 1990 to 2005 was responsible for giving most of those managers their start. In 2005, Meyer left to found his own firm, the now–$10 billion Convexity Capital Management, which was seeded with $500 million in Harvard endowment money, a fact that underscores another benefit managers might get from beginning their career at a pension fund.
Running a hedge fund at a public pension system, however, presents a unique set of constraints. Daniel Celeghin, director at Casey Quirk, the Darien, Connecticut–based management consulting firm, wonders if pension organizations aren’t too bureaucratic for hedge funds.
On the other hand, there’s no time like the present, argues Mark Anson, president of Nuveen Investments, a $115 billion, Chicago-based asset management firm, and a former chief investment officer at CalPERS. There are lots of hedge fund managers looking for work, Anson notes. He also points out that the industry’s traditional fee structure is under attack and that private sector pay may not be as good as it has been.
