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Follow Calpers to alternatives?

By Sheyna Steiner · Bankrate.com
Friday, September 30, 2011
Posted: 3 pm ET

The chief investment officer at the California Public Employees' Retirement System spoke to Bloomberg TV on Wednesday. Joe Dear, Calpers' CIO, says meeting their target return this year will be tough.

Over the long-term, Dear said in the Bloomberg story, "Calpers chief says 7.75 percent return (is) tough to meet," the returns of the largest public pension fund in the country have averaged 8.4 percent.

"Once you look at a significant length of time, the cycles smooth out and a portfolio with a patient, disciplined approach will produce a return that matches our expectation of 7.75 percent," Dear said in a telephone interview.

In the meantime, the U.S. will need to recover from the economic malaise as will Europe. But Dear plans to boost returns in the underfunded pension plan using alternative investments such as private equity and hedge funds.

"'We are in a low-return environment with a lot of downside risk right now. You need to be realistic about the prospects, and you need to ask what are the alternatives that might produce a better return than a class stock-bond portfolio,'" Dear said in the Bloomberg story from Wednesday.

Most small investors find themselves shut out of a lot of the high-end alternative action. But efforts to bring alternatives to the retail market may attract some investors interested in copying the big-time institutional investors.

A few months ago I wrote a story for Bankrate called "Alternative funds for investors." These funds use different strategies than most mutual funds, which employ long-only strategies.

When you buy a stock, you're said to be long that position. Long-short funds, on the other hand, own some securities they believe will go up in price and will short securities that they believe will decrease in price. When shorting, the fund manager will borrow the securities to sell and rebuy them at a higher price. The securities are returned to the original owner, and the mutual fund pockets the difference.

They can invest in anything from stocks and bonds to currencies and commodities.

Also available to investors are managed futures funds and market neutral funds. All three types of alternative funds move differently than the stock and bond market.

They're more complicated than a traditional mutual fund and more expensive in some cases. They aren't generally going to outperform the market necessarily, but they may offer diversity and some downside protection for when stocks take a tumble.

My colleague Barbara Whelehan wrote a blog post on them back in May.

That's the problem with these alternatives. Many have periods of great glory, followed by periods of utter humility. I don't advocate using them for retirement planning purposes. But if you decide to do it, I wouldn't load up on them like the big guns do. Maybe allocate 5 percent of your portfolio to these alternative strategies if you feel you must.

What do you think about mutual funds that go farther afield than traditional stocks and bonds?

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