Board Member Says CalPERS Kept Quiet About Cutting Tail-Hedge Strategy

Margaret Brown asked CalPERS CIO Ben Meng about the tail-hedge strategy at a March meeting, roughly two months after the strategy was fully unwound.

Sacramento, California. (David Paul Morris/Bloomberg)

Sacramento, California.

(David Paul Morris/Bloomberg)

The California Public Employees’ Retirement System’s board was kept in the dark about how the pension unwound a so-called tail-hedge position — just before the recent downturn, when the position would have protected its portfolio, a board member alleges.

Margaret Brown, an all-member representative for CalPERS, posted on her Facebook page on Thursday that the board was never told about the elimination of one of two tail-hedge strategies, which are designed to protect portfolios against market crashes. And meeting minutes show that Brown asked CalPERS CIO Ben Meng about the strategy at the pension’s March meeting.

“Ben, can you tell me how our left-tail investments are performing?” Brown asked, according to the meeting minutes. “Are they performing the way we thought they would in this economic downturn?”

In response, Meng said: “Yes, for any left-tail risk hedging strategy you’re referring to, they should perform well in this kind of a down market, as they were exactly designed to do. And from what we know are most of these strategies are performing as anticipated.”

On Facebook, Brown pointed out that Meng failed to mention at the time that the pension had already unwound those positions.


“The CIO was asked on March 18 how our tail risk strategies were performing. Mr. Meng’s response omitted that he had abandoned the Universa hedge,” she wrote, referring to a position run by Universa Investments. “The board must hold the CEO and CIO accountable and finally begin taking its fiduciary oversight role seriously.”

CalPERS decided in October 2019 to eliminate the program because of its high cost and lack of scalability, Institutional Investor previously reported. The program could have paid out $1 billion in March.

The strategy was run by two firms: Universa ran the largest portion of the mandate, while LongTail Alpha of Newport Beach, CA, managed another portion, II previously reported. Those positions were unwound over the standard 90 days, which means that by the end of January, the program had ceased to exist.

[II Deep Dive: The Inside Story of CalPERS’ Untimely Tail-Hedge Unwind]

A spokesperson for CalPERS did not immediately respond to a request for comment. Brown did not immediately return an email seeking comment.

The $350 billion pension fund began its tail-hedge program in 2016 under former chief investment officer Ted Eliopoulos, and by 2017, it had hired Universa and LongTail Alpha, II previously reported.

A tail-risk hedging program is designed to pay out during a downturn, operating much like an insurance policy.