Barry Ritholtz asks the right question—Why hedge?–in the wake of last week’s announcement that California Public Employees’ Retirement System (Calpers), the elephant in the room in the world of pension funds, is ending its decade-long experiment with hedge funds. The allure of these products in the wider world has been driven primarily by the hope that the funds will deliver outsized returns relative to the usual suspects. But smart investors like Calpers have also been drawn to the risk-management aspects of these hedge funds—i.e., low correlations with conventional portfolios of stocks and bonds. After the financial crisis of 2008, the focus on owning stuff that acted differently in times of elevated market stress while offering relatively high expected returns through time required no explanation. But a funny thing happened on the way to nirvana—the results fell short of the sales literature.
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