CALPERs, the huge pension for California state employees, made news with its latest investment policy shift where it will completely divest its hedge fund exposure over the course of the next year. At almost $300 billion in AUM, CALPERs is big enough to potentially move markets and it certainly is big enough to engender interest in its investment decisions.

There have been various policy decisions made by CALPERs over the years. The WSJ notes that CALPERs first got into hedge funds about a decade ago and now of course they plan to get out.

This raises an interesting behavioral question. Why are they getting out? CALPERs has said they want to simplify and of course simple is good but why do they want to simplify? The WSJ says it is not because of performance but if their hedge funds were adding tremendous value to the results (tremendous value is intentionally vague) do you think they would be divesting? I would say no.

Why did they get into hedge funds in the first place? Reasonably speaking they were looking to enhance results (either seeking better risk adjusted returns or maybe better nominal returns).

For a long time I’ve been writing about the idea that an adequate savings rate combined with going along for the ride with stocks (good and bad) would get the job done for most people in terms of meeting long term goals but a crucial part of that equation is maintaining a suitable asset allocation. Maintaining means not becoming impatient with the asset class that is underperforming.

If you have exposure to multiple asset classes you do so for diversification and when you have multiple asset classes one must be the top performer and one must be the laggard. Giving the benefit of the for reasonable asset class selection, no single asset class can always outperform and no single asset class can always lag. Since no one can truly know which asset class will lead or lag you maintain exposure to many to get the desired long term result. But the key to that is maintaining that exposure.

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