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percent allocation. Such low returns for such a large portion of the portfolios are diverting some interest to explore other investment possibilities, including alternative investments. (See Table 18.2.)

Preferred Strategies.

Many of the institutions are allocating to a market neutral strategy such as long/short, convertible arbitrage, or merger arbitrage that is expected to deliver 1 percent to 1.5 percent a month. Some feel comfortable taking a market neutral fund of funds approach.

Others use an overlay approach. For example, they may overlay market neutral equity long/short strategy with S&P 500 futures, creating an enhanced index strategy.

Portable alpha is the concept that describes a product being structured around market neutral hedge funds while using a futures overlay benchmark. For example, if using the strategy with an overlay of S&P 500 futures, the pension plan gets a return that exceeds the S&P 500. The client can pick whatever futures contract as a benchmark one prefers. The concept is referred to as portable alpha since the client decides which asset class can receive the excess return and can change that decision each year, thus making it portable.

CASE STUDY INTERVIEW: CalPERS

CalPERS has been involved in hedge funds since about mid-1999. Mark Anson, senior principal investment officer, says that less than 1 percent of the $168 billion in assets is committed to hedge fund managers. For there to be any increase, board approval is needed.

In February 2000, CalPERS had allocated a $125 million investment to Abacus Partners. And in August 1999, CalPERS had allocated about $300 million to Pivotal Partners Fund, a San Francisco–based fund that invests in computer-related technology companies. Pivotal's two founders used to manage money for CalPERS before they started their hedge fund in 1998.4 About $900 million had already been committed to three corporate governance funds.

CalPERS's objective is to invest in hedge funds on an opportunistic basis. "I use hedge funds not to hedge but rather to expand my investment opportunity set," says Anson. He is looking for managers