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up to $2 billion of its assets (i.e., 5 percent of its actively managed U.S. stock investment) in hybrid strategies. Hybrid strategies include, among other things, hedge funds, market neutral funds, arbitrage funds, and corporate governance funds (those that seek to improve returns by influencing company management). At CalPERS, these investments are considered part of the U.S. equity allocation rather than its alternative investment weighting. In November 2000, CalPERS said they intended to devote $1 billion to hedge funds.

CalPERS's actions added credibility to the hedge fund community as an investment for other pension boards. With the largest U.S. pension plan making an allocation, others became interested. For example, in May 2000, Public School Teachers' Pension and Retirement Fund of Chicago announced its interest in adding $600 million to its hedge funds and emerging managers program. This fund increased its commitment to alternatives to 4 percent of the total fund.

Another example is New York State Teachers Retirement System. The $91 billion fund indicated it, too, is researching the concept and would invest as much as $1 billion in the sector. An allocation to several managers is being investigated.

The $1.4 billion Oklahoma Firefighters' Retirement System announced plans to allocate $100 million to hedge funds. It was reported that Pequot Capital, Capital Works, and Weiss Peck Greer would each receive a $33.3 million allocation.2

Meanwhile, the $5.7 billion Louisiana State Employees Retirement System is seeking an event-driven manager for a $50 million allocation.3

The long-term objectives of these institutions are to achieve higher absolute returns and diversify from traditional investments such as stocks and bonds, especially if they are wary about the volatile stock market. An increasing number of institutions do not expect the stock market to return 15 percent per year over the long term. The attractions of hedge funds lie in their historically high returns and their potential for a lower correlation of returns with traditional stock and bond management, reducing the overall volatility of an institution's total portfolio.

Institutions have also been increasingly examining the bond portion of their portfolios. In many cases, that asset class receives about a 30

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