University of California Completes Full Divestment from Hedge Funds

The University of California (UC) has completed a full divestment from hedge funds, reallocating the 10% of its $190 billion investment portfolio previously held in these assets to public equities. This decision concludes a five-year process initiated in 2020.

Jagdeep Singh Bachher, UC's Chief Investment Officer since 2014, has been a vocal critic of hedge funds, citing their failure to provide adequate risk protection during significant market downturns in 1999, 2008, and 2020. He argued that hedge funds introduced additional risks and complexities, often accompanied by high fees and limited liquidity. Bachher remarked, "In each of those three scenarios, hedge funds didn't hedge us. They exposed us to the opposite kind of risk, which actually meant they hurt us."

The UC investment portfolio, managed by UC Investments, includes the university's endowment, pension, retirement savings, and working capital. As of the 2023-2024 fiscal year, the total investment portfolio grew to $180 billion, marking a $16 billion increase over the previous year.

In 2020, UC Investments began a strategic shift by initiating the divestment from hedge funds, aiming to reallocate resources to more transparent and liquid assets. This move was part of a broader trend among institutional investors reassessing the value and performance of hedge funds in their portfolios.

Bachher also criticized the hedge fund industry's fee structures, noting the shift to "pass-through" fees that cover all expenses, including office rent and client entertainment, deviating from the traditional model of a fixed management fee. He suggested that the endowment could have achieved comparable returns with less complexity and cost through traditional stock and bond investments.

UC's decision to divest from hedge funds underscores a growing skepticism among institutional investors about the value proposition of these investment vehicles. The move reflects a broader trend of seeking more transparent, liquid, and cost-effective investment strategies.

The University of California has a history of making significant divestment decisions based on ethical and financial considerations. In 1986, UC divested $3.1 billion from companies doing business with apartheid-era South Africa, a move that Nelson Mandela later acknowledged as influential in the fight against apartheid. More recently, in 2020, UC fully divested from fossil fuels, citing financial risks associated with such investments.

UC's divestment from hedge funds marks a significant shift in its investment strategy, reflecting broader trends and raising important questions about the future of institutional investing.