EMPLOYEES RETIREMENT SYSTEM OF TEXASHEDGE FUND
(“ABSOLUTE RETURN STRATEGIES”)
POLICIES AND PROCEDURESEFFECTIVEAugust 23, 2011
I. INVESTMENT OBJECTIVESA. INVESTMENTS IN HEDGE FUNDS
The Employees Retirement System of Texas (“ERS” or “the System”) has dete
rmined that theinclusion of hedge funds
would enhance ERS‟
ortfolio (“Total Portfolio”) investment
characteristics. The objectives of t
hedge fund program include (1) preserving the
System‟s capital, (2) enhancing the System‟s Total Portfolio risk
-adjusted returns, (3) further
diversifying the System‟s Total Portfolio,
and (4) reducing the Sy
stem‟s Total P
ortfolio volatility.The underlying philosophy of the program will be to attain equity-like returns with bond-like risk.
The System‟s investment policies are determined by the Employees Retirement System of TexasBoard of Trustees (“Board” or “Board of Trustees”).
In general, ERS‟ long
-term goal for the Total
Portfolio is to earn a return that will insure the payments due to members of the System‟sretirement plans and their beneficiaries at a reasonable cost to the System‟s members and the
taxpayers of the State of Texas.
hedge fund portfolio investments shall be made in a manner consistent with the wholeportfolio approach, as provided in the Texas Trust Code and the exclusive benefit requirements ofthe Texas Constitution. The selection and management of hedge fund portfolio assets will beguided to maintain prudent diversification of assets with regard to the selection of hedge funds
and to preserve the System‟s investment capital.
The diversification objective is required tomanage overall market risk and the specific risks inherent to any single investment strategy orsingle manager.For purposes of these
Policies and Procedures
, hedge funds differ from traditional investmentstrategies in that they derive a particular return from the skill of the hedge fund manager andallow the use of investment vehicles not currently being utilized for the Trust, whereas traditionalinvestment strategies, derive a return that captures a risk premium associated with a particularasset class/sub-asset class, e.g., domestic large cap equities and fixed income securities. Whilethere are many different hedge funds available, ERS categorizes the various hedge fundstrategies into four broad classes:1. Relative Value Strategies2. Event Driven Strategies3. Long/Short Equity Strategies4. Tactical/Directional Strategies
investments in hedge funds are designed to create a portfolio of alternative investmentswhich 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.The ERS investment approach is one of active participation in the investment decision processwith ERS retaining control over the selection of hedge funds. Such an active approach will requirethe necessary Staff involvement in addition to accessing third-party professional expertise.