Hedge Fund Program

CalPERS began investing in hedge funds in April 2002 with the goal of diversifying its investment portfolio, managing risk, and adding value to the fund. There are great benefits in reducing risk by diversifying our portfolio across a broad array of asset classes, such as U.S. equity, international equity, U.S. Treasury bonds, corporate bonds, mortgages, high yield, private equity, venture capital, real estate… and hedge funds. The hedge fund program’s title -- CalPERS Risk Managed Absolute Return Strategies (RMARS) -- reflects the importance of risk control in our investments.

The program is explicitly constrained to have no more risk than ½ that of the U.S. equity market, that is, risk no greater than 50% of the risk of the S&P 500.  The program return goal is equivalent to 1-year Treasury bills +5%, while taking limited risk.

Three sets of eyes monitor our hedge fund portfolio: internal investment staff and two outside advisors: PAAMCO (Pacific Alternative Asset Management Co.) and UBS.  Within CalPERS, a committee of highly skilled investment professionals reviews every hedge fund investment before it’s added to the CalPERS portfolio. The committee also oversees manager due diligence, selection, contract negotiation, portfolio construction, risk analytics, manager monitoring. Investment staff and program advisors spend hundreds of hours researching individual hedge funds, auditing their investment process, interviewing the hedge fund manager, checking references, reviewing broker statements, talking to their auditors, examining their compliance systems, and plotting their performance before an investment is made. 

We continue to monitor monthly returns and risk profiles to ensure managers deliver as promised – with the same questions, scrutiny, examination and thoughtfulness that went into selecting the manager in the first place. CalPERS staff speak with every hedge fund manager monthly and visit them semi-annually.

Dated: 10-23-2006