CalPERS Insight’s Bob Burton sits down to talk with CalPERS’ CIO Ted Eliopoulos about the pension fund’s decision to terminate its hedge fund program. “Almost simultaneous with your appointment, CalPERS dropped hedge funds from the portfolio,” Burton points out, before asking Eliopoulos: “What drove the decision?” Readers who’ve been following the CalPERS story will not be surprised by Eliopoulos’s answer: “The main driver of the decision was CalPERS’ scale,” referring to the relatively insignificant size of the hedge fund program within CalPERS’ huge investment portfolio. Later in the video, Burton asks Eliopoulos how CalPERS is taking climate change into consideration, to which Eliopoulos responds, “We view it as a risk factor within our overall portfolio.”
Markov Processes recently analyzed the issue of scale as it relates to hedge fund programs for large institutional investors. They found that having a 1% allocation to hedge funds hardly mattered, yet at 10%, it can improve the overall risk, return and Sharpe ratio of a portfolio. However, manager selection is important and can have a meaningful impact on outcomes.