James Moore: If hedge funds fail to deliver they must expect consequences

Sadly, no one’s forcing the world’s legislators to follow the rules

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Outlook: The opponents of casino capitalism can raise their glasses to Calpers, the giant California Public Employees Retirement Scheme. It has cashed in its hedge fund chips.

Well, rather, it will be cashing them in. It says a lot that the scheme’s disengagement from the sector will take at least a year. A lack of liquidity wasn’t listed among its reasons for walking away, but it might as well have been.

The response of critics was wearily predictable. One Anthony Scaramucci, founder and co-managing partner of something called SkyBridge Capital, haughtily told The New York Times that the move was “an admission by Calpers that they don’t have the right staff or the right managers”.

No, Mr Scaramucci, it wasn’t anything of the kind. Nor, to be fair, was it a nod to the hedge fund industry’s many critics.

Calpers’ move was, rather, based on a coldly rational assessment of the funds, their costs and their usefulness to it when set against their relatively high risk profile.

For a start Calpers is big – overseeing assets in excess of $300bn (£185bn). So it needs to make very big investments. There aren’t that many players that can cope with the size of cash inflows the scheme needs to make dealing with them cost effective and worthwhile.

It wouldn’t matter all that much if the sector was paying its way. It hasn’t been.

The sector-wide returns over the past few years have been miserable. In Calpers’ last fiscal year, for example, it made 7.1 per cent from its hedge fund portfolio, against an overall return from all asset classes of 18.4 per cent. And yet it handed over $135m to its hedge funds’ managers. A sports car fee for the performance of a clapped-out old banger.

Industry-wide, the stats get worse. According to the Wall Street Journal, the average public pension fund’s gains from hedge funds was 3.6 per cent for the three years ending 31 March compared with 10.9 per cent from private equity, 10.6 per cent from stocks and 5.7 per cent from fixed-income.

Pension money poured into hedge funds after the schemes’ holdings were badly hit by the financial crisis. Too many have been burned again by the sector’s struggles to produce acceptable returns, and burned once more by hedge fund managers’ demands for fat fees to fund their weekend homes in the Hamptons.

No, Mr Scaramucci, Calpers does have the right staff. It has the sort of people who can spot that they have been sold a pup. And it has the sort of people with the gumption to act upon that realisation.

There are plenty who will continue to hear the sector’s siren call. But Calpers may not be the last big US pension fund to call last orders. Nor should it be.

A bold move, but the tax party isn’t over yet

 “You multinationals stand ready. It’s over,” said Pascal Saint-Amans, who heads the OECD’s Centre for Tax Policy and is in charge of that august body’s attempt to crack down on the wanton abuse of the international system.

Would that it were so. The behaviour of the likes of Apple, Amazon and Starbucks may be appalling. The use of the so called “Double Irish” or the “Dutch Sandwich” might find legislatures around the world in rare angry accord with the people they govern.

But it’s worth remembering that those “dodges” are entirely legal. No one has ever suggested otherwise. When Apple tells the US Congress it pays every buck it owes to Uncle Sam, it’s right. As the slogan goes, “Why pay more?”

It isn’t just the Dutch and the Irish, either. There has been a race to the bottom when it comes to corporation tax, and among the larger economies the UK has been in the lead. That’s why Pfizer was so keen to get its hands on AstraZeneca. It wasn’t Astra’s drugs Pfizer was after. It was its tax code.

Mr Saint-Amans and the OECD are serious this time. They’ve outlined a range of measures that ought – ought – to curtail the worst of the abuses, and more closely align tax with economic activity. It seems that there is broad agreement that something has to be done, although the proposals still have to go to the G20.

And there’s the problem. The $100bn or so saved through abuses the OECD is trying to stop will buy an awful lot of lobbying. We’ve already seen the likes of Republican Senator Orin Hatch chuntering about a possible plot against the US in its work (no, you fool, these measures will do more for Uncle Sam and his deficit than anyone else). Sadly, no one’s forcing the world’s legislators to follow the rules. Mr Saint-Amans’ bold statement might be just a bit premature.