The CalPRS Debate: What we can learn
We've heard a lot of debate among allocators, advisors and managers about CalPRS' decision to divest hedge funds. Everyone has an opinion as to whether it was a good or bad move, but what can we learn from it?
One thing everyone seems to agree on is that hedge funds, as a whole, have underperformed the stock market for the past 10 years. But that is only half the story. In a recent study by Cliffwater, the standard deviation of a portfolio with a 20% allocation to hedge funds was almost a full percentage point lower than a purely traditional portfolio over the past decade. Additionally, this same portfolio had a Sharpe ratio of 0.50 compared to 0.45 for the traditional portfolio. Simply put, portfolios with exposure to alternatives provided better risk-adjusted returns than traditional portfolios over the past decade.
That’s a good story, but it doesn’t make the headlines. Why?
We think that as a whole, alternative managers need to do a better job of explaining exactly what their strategy can do on both a return and risk basis. This is why the powerful risk-mitigation message about hedge funds was overlooked. If you ask any advisor to explain the purpose and role of an alternative strategy, they are hard-pressed to clearly articulate it. Ask them how well it performed and they also struggle. Today, alternative managers need to go beyond boilerplate commentary and performance statistics to create performance updates that tell their whole story in a relevant way.
Enter the ”Successful Performance Updates Checklist”
See how well your Performance Updates stack up against industry best practices. Do your updates…
- Compare the net risk and return of your strategy v. benchmarks?
- Cleary state managers’ convictions and prudent risk-taking?
- Develop an evolving story line explaining portfolio positioning?
See the full checklist here