Calpers, the largest US pension fund, is slashing the number of private equity managers it uses and teaming up with other investors to drive down fees, as it extends a review of alternative investments that has already resulted in it pulling out of hedge funds entirely.

Last year the $300bn pension fund unsettled the investment industry by axing its allocation to hedge funds, arguing that they were too costly and too complex, and its priorities for 2015 now include sweeping changes to its portfolio of buyout and venture capital funds.

Ted Eliopoulos, Calpers chief investment officer, told the Financial Times that it would use “every possible lever” to drive down costs, as US pension funds intensify the debate about whether private equity groups justify the large management and performance fees they charge.

Calpers, or the California Public Employees’ Retirement System, said it was hoping to cut the number of private equity managers it used by more than two-thirds, to 120 or fewer, and Mr Eliopoulos suggested the final number could fall below 100.

“By having fewer managers, at larger scale, we will be able to reduce our overall costs,” he said. “We are looking at every possible lever to use to lessen the cost but make sure we still have access to the talent that we need.”

The pension fund is also looking for other investors to team up with on certain investment strategies. Its aim is to negotiate better deals from private equity managers, Mr Eliopoulos said. “By working with like-minded partners, we also believe we will be able to reduce our costs over time.”

US public pension funds are coming under political pressure to justify the outsize fees they pay to private equity and hedge fund managers, who can charge close to 2 per cent a year plus 20 per cent of the returns they make. Local campaigners and the Securities and Exchange Commission are both pushing for greater disclosures of these fee arrangements.

Calpers had $31.5bn invested in private equity at the end of its last financial year in June, down from $32.3bn the previous year, and in recent months cut its target allocation from 14 per cent to 10 per cent of its total investments. However, this remains substantially more than the less than 2 per cent it had allocated to hedge funds.

Its private equity portfolio — which is mainly in buyout funds, with only a minority in venture capital — returned 20 per cent in the last financial year, and 13.3 per cent annually over the past decade.

Calpers’ investment committee will on Tuesday debate changing the benchmark for the performance of its private equity investments, to give it additional flexibility as it alters the portfolio.

The first casualties of its review of managers were expected to be “funds of funds”, which invest in a portfolio of private equity vehicles. They have been criticised for adding an extra layer of fees while reducing the chances of outperforming the wider industry.

But shifting Calpers’ allocation to private equity funds is expected to take several years because of the long life of the investments.

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