The program wasn’t cheap. CalPERS calculated that in the year ended June 30, 2019, the Universa and LongTail Alpha investments reduced its 12-month return by a total of 4 basis points, or roughly $140 million.

Some of the hedging expense was management fees. Public filings show CalPERS paid Universa $22.5 million and LongTail Alpha $3.2 million that year. The remaining cost reflected the declining value, or bleed, of the underlying positions at a time of low market volatility.

‘Price Matters’

At its peak, the Universa hedge was enough to protect some $5 billion of CalPERS’s $200 billion in public equities, and Eliopoulos had plans to double the program’s size, the people said. It’s unclear how extensive the LongTail Alpha position was.

Most institutional investors prefer a more traditional approach to risk management, such as diversifying assets and holding Treasuries. Insurance is harder to grasp and fund managers typically balk at the idea of investing in anything that loses money most of the time, according to Macro Risk Avisors’ Curnutt.

“Tail-risk hedging does work,” Curnutt said. “But the price matters quite a bit.”

The payoffs can be staggering. In an April 7 letter to clients, Universa said its fund returned 3,612% in March. CalPERS could have used that windfall of more than $1 billion to buy more stocks at lower prices or stayed in cash.

Eliopoulos left CalPERS in late 2018 and joined Morgan Stanley as a vice chairman. He declined to comment.

Meng, a former Wall Street trader, was skeptical of tail-risk hedging and ordered a review of the program as part of a wider effort to reduce the number of outside asset managers that CalPERS paid, the people familiar with the situation said. A number of his subordinates argued in favor of keeping the hedges in place, saying it was only a matter of time before the 10-year bull market in stocks came to an end, the people said.

They lost the battle, and CalPERS moved to redeem its tail-risk investments. It gave notice to Universa in October and by January no longer had the position in place that would have paid out more than $1 billion, according to those with knowledge of the decision.