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Appendix APROPOSEDEMPLOYEES RETIREMENT SYSTEM OF TEXAS
HEDGE FUND (“ABSOLUTE RETURN STRATEGIES”)
 FISCAL YEAR 2012 ANNUAL TACTICAL PLANI. EXECUTIVE SUMMARY
ERS’ investments in hedge funds are designed to create a portfolio of alternative investments
which will enhance long-term investment performance, diversify the asset base and reduce thevolatility of returns for the entire ERS investment portfolio. The ultimate objectives are to preservecapital, provide competitive returns, reduce portfolio volatility and act as a diversifier to the totalERS portfolio.This
Hedge Fund Portfolio Fiscal Year 2012 Tactical Plan (“Annual Tactical Plan”)
has beenprepared by Staff and the Consultant. It is intended to be a planning document which outlines thesteps to be taken over the next twelve (12) months to further hedge fund portfolio objectives and toaddress considerations germane to the administration and success of the hedge fund program. This
Annual Tactical Plan 
is a guiding reference only, and it is not intended to overrule prudent hedgefund investment decision-making.While this
Annual Tactical Plan 
is considered prudent and effective for the implementation of thehedge fund program it may require amending based upon the opportunities available in the market.Importantly, while this
Annual Tactical Plan 
highlights significant capital commitments during the2012, 2013, and 2014 fiscal years, not all of the capital committed may be invested by ERS due to
factors beyond ERS’ control.
The ranges given provide flexibility to the targeted commitment amount
to provide for varying market opportunities as well as availability of ERS’ resources.
Moreover, Staffand the Consultant may request a change of pace of investment in subsequent
Annual Tactical Plans 
in order to better take advantage of market opportunities.
II. GENERAL ALLOCATION COMMENTS
Although academic literature would suggest that 15 hedge funds in the portfolio would provide nearoptimal portfolio diversification, allocating to additional funds does further reduce manager specificidiosyncratic risk. Furthermore, additional funds may also be added as a result of qualitative andquantitative factors involved in manager sizing decisions. These factors include, but are not limitedto: fund and/or strategy capacity, conviction, alignment of interests, risk management, andtransparency. It is anticipated that the portfolio will be comprised of 15 to 25 funds by the end of2014.Fund redemptions, once the portfolio becomes more fully invested, are also possible due to strategyreallocations and changes in manager conviction. In general, some level of manager turnover isexpected on an annual basis.Individual funds will typically receive initial allocations between USD $50 million and USD $100million. More established funds in the portfolio may have larger allocations due to growth throughpositive returns. Regional target allocations by geographic region are not specified becauseallocations are strategy driven.Core investments are expected to represent between one-third and one-half of all investments,with allocations generally between USD $75 million and USD $100 million (approximately 6.5% to8.5% of the hedge fund portfolio). Satellite investments are expected to represent between one-
 
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half and two-thirds of all investments, with allocations generally between USD $40 million andUSD $60 million (approximately 3.5% to 5% of the hedge fund portfolio).
III. FUNDING LEVELS FOR FISCAL YEARS 2012 - 2014
As of June 30, 2011, the hedge fund portfolio stands at $0, thereby necessitating significant capitalcommitments during the 2012 to 2014 fiscal years in order to achieve the full hedge fund portfolioallocation by the end of fiscal year 2014 (5.0% of the Trust for the hedge fund portfolio). While this
Annual Tactical Plan 
is considered prudent and effective for the implementation of the hedge fundprogram, it may require amending based upon opportunities available in the market. The ERShedge fund portfolio projects the following capital commitment requirements over the next three fiscalyears:
Fiscal Year Commitment (+/- 100m
2012 $358,000,0002013 $500,000,0002014 $300,000,000
Total $1,158,000,000
It is anticipated that allocations in the first year will be biased towards core investments, whereasallocations in subsequent years are expected to be progressively biased towards satelliteinvestments. As a result of this progression from core to satellite investments, the fiscal yearcommitments are expected to decline in year three.The following table illustrates how investments in the next three fiscal years will be divided betweencore and satellite positions:
New Investments per Fiscal Year Cumulative PortfolioInvestmentsCategory
 
2012 2013 2014 2012 2013 2014
Core 4
 –
6 2
 –
6 0
 –
2 N/A 6
 –
10 6
 –
10Satellite 0
 –
2 4
 –
8 6
 –
10 N/A 6
 –
10 10
 –
16
Total 4
 –
8 8
 –
12 6
 –
12 4
 –
8 12
 –
18 16
 –
24IV. PROPOSED FUNDING BY STRATEGY FOR FISCAL YEARS 2012 - 2014New Investments per Fiscal YearCategory
 
2012 2013 2014
Relative Value $107,000,000 $150,000,000 $90,000,000Event Driven $107,000,000 $150,000,000 $90,000,000Long/Short Equity $72,000,000 $100,000,000 $60,000,000Tactical/DirectionalOpportunistic$72,000,000$0$100,000,000$0$60,000,000$0
Total $358,000,000 $500,000,000 $300,000,000
 
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Cumulative Portfolio InvestmentsCategory
 
2012 2013 2014
Relative Value $107,000,000 $257,000,000 $347,000,000Event Driven $107,000,000 $257,000,000 $347,000,000Long/Short Equity $72,000,000 $172,000,000 $232,000,000Tactical/DirectionalOpportunistic$72,000,000$0$172,000,000$0$232,000,000$0
Total $358,000,000 $858,000,000 $1,158,000,000Commentary
These proposed strategy class allocations represent the mid-points of the policy target ranges. Theproposed funding to Relative Value and Event Driven strategy classes each equate to 30% of thehedge fund portfolio assets. The proposed funding to Long/Short Equity and Tactical/Directionalstrategy classes each equate to 20% of the hedge fund portfolio assets.
Funding TablesCurrent Funding Position
Total ERS of Texas Portfolio Size as of June 30, 2011 $23,158,625,353Total Hedge Fund Allocation at 5.0% $1,158,000,000Current Hedge Fund Portfolio Value $0
Fiscal Year Commitment (+/- $100m) Ranges
2012 $358,000,000 $250,000,000 -$450,000,0002013 $500,000,000 $400,000,000 -$600,000,0002014 $300,000,000 $200,000,000 -$400,000,000
Total $1,158,000,000Yearly Average $386,000,000Proposed Funding for Fiscal Year 2012Category
 
Number ofInvestmentsCommitment Ranges
Relative Value 1
 –
2 $107,000,000 $50,000,000 - $150,000,000Event Driven 1
 –
2 $107,000,000 $50,000,000 - $150,000,000Long/Short Equity 1
 –
2 $72,000,000 $50,000,00 - $100,000,000Tactical/Directional 1
 –
2 $72,000,000 $50,000,000 -$100,000,000Multi-Strategy*Opportunistic1
 –
20 - 3N/A$0N/A$0 - $53,700,000
Total 4
 –
8 $358,000,000 $250,000,000 -$450,000,000
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