The California Public Employees' Retirement System (CalPERS) has issued a Memorandum to hedge funds in which the CalPERS Risk Managed Absolute Return Strategies (RMARS) program invests. The Memorandum focuses on the following three areas:
- Alignment of Interests: RMARS will no longer partner with managers whose fee structures result in a clear misalignment of interest between managers and investors. In this regard, (i) management fees must be designed to sustain the business without encouraging asset gathering at the expense of returns, and managers of funds without hurdle rates (cash or otherwise) must provide a valid explanation for maintaining a fee structure which calls for a performance fee to be paid even when a fund returns more than zero but less than cash; (ii) managers will no longer be permitted to crystallize all accrued performance fees prior to the conclusion of RMARS’s relationship with the manager; and (iii) managers must demonstrate how the firm will retain talent in the event of a difficult year for the manager’s funds.
- Control of Investments: CalPERS will seek to gain greater control over RMARS investments by increasing its use of separate or managed accounts and by entering into account relationships tailored to a manager’s strategy and investment approach, especially as to investment type, time horizon and liquidity, including the ability to gate or suspend redemptions.
- Transparency of Information and Risks: RMARS will no longer invest with managers who do not provide “security-level” transparency on a more or less contemporaneous basis. To provide such transparency, RMARS suggests that hedge funds offer a managed or separate account over which CalPERS maintains control and/or custody of investments or provide complete transparency through channels to be determined (e.g., prime broker feeds, risk aggregators, etc.).
Click here to read the press release from CalPERS.