Last week, California Public Employees’ Retirement System (CalPERS), the largest pension fund in the US, announced that it would pull all $4 billion from its hedge fund investment program of 24 hedge funds and six hedge “fund-of-funds”. CalPERS was one of the first pension funds to invest in hedge funds in 2002.

Hedge funds – (relatively) small investment managers that have the authority to invest their clients’ assets across multiple market, sector, interest rate, currency or other strategies – have traditionally promised their investors high returns in exchange for a fixed management fee of 2% a year, plus 20% of any profits made (a fee structure commonly referred to as “2 and 20″).

Ted Eliopoulos, interim Chief Investment Officer at CalPERS said, “One of our fundamental investment principles is that cost matters”.

According to Edmund Truell, chairmain of the London Pensions Fund Authority, “In a low interest rate environment you cannot justify the hedge fund fee structure. As a steward of public money we cannot pay those fees”.

While Eliopoulos said the decision wasn’t related to the performance of the investment program, its hedge fund portfolio overall has delivered poor returns over the past few years that have failed to outperform the HFRI, a benchmark hedge fund index.

While other pension funds may follow CalPERS and trim or eliminate their hedge fund exposures, it’s unlikely that the $2.8 trillion hedge fund industry (that has tripled in size over the past decade) will see a mass exodus of investors. Many state pension funds, like the State Pension Fund of New Jersey, have recently announced that they are increasing the commitment to hedge funds in their portfolio.

However, it has become clear to the investment community that many hedge fund strategies don’t rely on very obscure skills or strategies, and do not justify a high fee structures like the traditional “2 and 20” fee structure. Persistence in high hedge fund returns has become increasingly harder to find, leading many to reallocate their alternatives assets to liquid alternative investments with lower fees, moving away from direct hedge funds and fund-of-funds.