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Earlier this year, the US$181 billion California Public Employees’ Retirement System (CalPERS) announced it would restructure its relationships with its hedge fund managers to achieve better alignment of interests, more control of its assets and enhanced transparency. CalPERS has the scale and scope to be able to dictate terms to a much greater degree than other investors, but the move is indicative of a wider shift that’s occurring in the hedge fund world and managers are responding accordingly.

Janine Baldridge, global head of consulting and advisory services at Russell Investments, and director, research and strategy for its Americas institutional business, says pension funds are demanding more reasonable fees and more control over their hedge fund managers in today’s tougher market environment. This is leading to closer alignment between the investors and the funds, and is likely to reshape the way the industry operates in the future. “What we will see is more reasonable investment strategies, and we’ve seen that occur over the years with less independence of the underlying hedge fund managers to do their own thing at the expense of their investors,” she says.

“There’s a lot more discretion in the hedge fund environment and historically some hedge fund managers have taken a lot of discretion. As this market has more institutional money, institutions do want to give hedge fund managers flexibility to make money, but within a certain range. We’re still seeing underlying hedge fund managers take the discretion that they should, but appreciating that if they’re a long/short manager, they’re not going to be digging into credit or doing other things unless they go back to their investors and say ‘here are some good opportunities’.

“It’s appreciating that the investors are long-term investors but only to the extent that they believe they can articulate what their underlying investment managers are going to do for them.” Widespread asset reductions across hedge funds and fund of funds are the major driver behind the trend. “Where really good hedge funds had redemptions from good firms – they just needed their money back – we saw a lot offer good terms for new capital coming in,” Baldridge says. While there’s still not a lot of new capital going into hedge funds or alternatives generally, Baldridge says newer hedge funds are lowering their fees in a bid to attract pension funds back to the market.

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