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who target a particular sector or segment that isn't covered in the portfolio. They are meant to fill gaps in the portfolio. He says the objectives have been met.

Reflecting upon good and bad experiences with managers, Anson says good experiences are those managers who know exactly what their competitive advantage is and how to exploit it.

Bad experiences include managers who are unable to explain in simple terms what they do. "A hedge fund manager that cannot explain to me his investment objective in a precise format will fall to the bottom of my pile. If he can't explain to me his investment objective in clear and precise terms, then I question whether he can implement an investment strategy in a clear and precise manner."

Other bad experiences with managers involve those who believe they can charge outrageous fees as a matter of entitlement. "One hedge fund manager said to me: 'We charge 3 percent and 30 percent because that is the only way we can keep our assets under management down to several billion.' This manager went to the bottom of my pile," said Anson.

CalPERS is interested in crossover or hybrid funds that contain a component of private equity and an equity long/short program within a targeted sector or segment. Many of these crossover funds come from the private equity sector and target a specific industry such as the Internet, media, or communications.

CalPERS will consider new hedge fund managers if they have been successful in other venues of investing such as private equity, says Anson.

What about a fund of funds? Anson says it is a valuable product for portable alpha but it is an unfinished product. "It is unfinished because I must decide when, where, and how to apply it to my portfolio."

CalPERS does not use a consultant to allocate to hedge funds but does use Wilshire Associates for due diligence regarding selected managers.

Transparency is a critical issue for CalPERS for two reasons. First, hedge funds use trading programs and strategies that are very different from the traditional long-only investments to which most institutions are accustomed. Second, says Anson, given the unique skill-based nature of hedge fund investing, you cannot add the risks of one hedge fund manager onto another. Hedge fund strategies map