Smart Money: CALPERS Mulls Pay for Performance

This issue might not make sense to those outside of the investment management industry, but it’s a very important development for our profession. According to Lisa Scherzer at SmartMoney.com, the California Public Employees Retirement System (CALPERS), an 800 pound gorilla among U.S institutional investors, is considering a new type of fee schedule for active investment managers that will compensate for alpha production only (alpha production can be thought of as returns in excess of a specified benchmark, which is usually a comparable security market index).

This is an important issue in our view for many reasons, reasons that can be summarized generally into the principle of alignment/misalignment of investment managers’ and clients’ interests. Traditional forms of manager compensation (and others’) are sometimes unfavorable to investors. This belief is one of the factors behind our choice of the word ’symmetry’ in our firm’s title, and is meant to convey a more balanced sharing of risks and returns between managers and clients. But a closer alignment of interests will require some courageous, outside-the-box thinking among industry practitioners and (importantly) their regulators. With its recent announcement, CALPERS appears to be treading a path in that direction–on behalf of pensions and their beneficiaries, at the very least.