Hedge Funds (Absolute Return Strategies 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 Pension Fund. There are great benefits in diversifying our portfolio across broad investments, such as U.S. equity, international equity, U.S. Treasury bonds, corporate bonds, mortgages, private equity, venture capital, real estate, infrastructure and hedge funds.
The program is explicitly constrained to have no more risk than half that of the CalPERS equity benchmark, that is, risk no greater than 50% of the risk of a global equity portfolio. The program return goal is equivalent to one-year Treasury bills +5%, while managing risk and avoiding "overpaying for beta."
The hallmark of CalPERS approach to hedge fund investing is the “Three Pillars” – alignment of interests, control of assets, and transparency of risks and exposures. In March 2009 CalPERS discussed the three pillars in this memo and continues to adhere to these principles.
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, and 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. These eyes and ears are supplemented by a fund-of-hedge-fund platform with investments focusing on Asia, Europe, and emerging managers.