CalPERS Risk Management System

CalPERS uses the Risk Management System to provide a comprehensive framework for measuring, monitoring and managing risk. This system is based on a quantitative model designed to produce a forward looking view of market volatility for the CalPERS Total Fund. The Risk Management System has been in place for a number of years and is currently being reviewed to determine which components should be updated.

The Risk Management team began work in early 2009 to enhance and enlarge the concept of risk to include additional measures such as counterparty risk, concentration risk, leverage and liquidity. These measures are intended to supplement the existing volatility measures and to provide a more complete assessment of risk. The sources of risk to CalPERS are constantly changing and managing those risks requires a more flexible approach to effectively identify, measure and communicate investment risk.

The Risk Management team uses these risk measures in combination to achieve a Total Fund view of the investment and risk profile at CalPERS, to increase return on risk taken, and establish risk as a key consideration in the investment decision-making process. These risk measures are intended to help us answer the question “how are we doing?” They provide CalPERS with a methodology to integrate expected returns with risk management and to incorporate risk targeting and measurement into the daily portfolio management process.

The Investment Committee receives quarterly risk updates based on these risk measures. The Committee also receives analysis of the risk impact to CalPERS Total Fund of new investment strategies. Risk management at CalPERS will continue to be an integral and evolving component in the investment decision-making process.

Dated: 02-25-2010