By Editorial Board Friday, September 19th, 2014

When Calpers talks, people listen.

So when the California Public Employees Retirement System, the nation’s biggest pension plan by assets, said it would divest its $4 billion in hedge-fund holdings, the decision sent shock waves through Wall Street.

In this case, the shock waves are to the benefit of the thousands of Calpers members in the Tri-Counties. And they should serve as a warning to the dozens of smaller foundations in the region that might be tempted by the lure of the “hedgies” and the promise of returns that have in actuality fallen short on the delivery end for any number of years.

Hedge fund managers are highly compensated — typically taking a 2 percentage point fee and 20 percent of any gains generated from their activities.

And those hefty fees have played a big role since the 2008 recession as the industry in aggregate has trailed the Standard & Poor’s 500 stock index for much of that time.

As spelled out in Michael Lewis’ book “The Big Short,” a few very savvy hedge fund managers hit it big in the financial crisis by figuring out how to get on the other side of trades in mortgage-backed securities. And there’s no doubt that for a period of time in the early 2000s, alternative investments outpaced conventional equity indexes in the wake of the Enron scandal and other so-called “black swan” events.

But over time — and time is what really matters to pension funds and foundations — the glitter of hedge funds has worn off. As the Federal Reserve extended its ultra-low interest rate policies, funds overall began to underperform the S&P 500 as investors flocked to unleveraged equity investments.

A series of insider-trading scandals showed that some hedge funds had resorted to illegal activities to gain a competitive edge. And funds that engage in high-frequency trading to front-run the orderly flow of market orders were unmasked in another Michael Lewis book, “Flash Boys.”

Yes, if private family offices or wealthy private investors want to try to beat the averages with hedge fund plays, more power to them. In the end, Calpers figured out that the primary beneficiaries of the hedge-fund boom were a few institutions clever enough to locate the few managers with the right formula for the current year and the personal retirement fund of Michael Lewis, who has made a small fortune out of writing about a few fund managers.

Hedge funds have had their day. The fact that Calpers is returning to its roots as largely an index fund equity investor is a positive sign.