According to this article hedge funds last outperformed the S&P500 in 2008. Even then, the return was less negative than the S&P. I agree with the notion that averaging returns from all hedge funds does not provide much information on top performers. However, past performance is no indicator of future performance. A winner for the last 5 years could be a loser the next. There is no reliable way to identify the top hedge fund managers over the next five years.
A good point was made about the time horizon of hedge funds. Hedge funds help “hedge” against risk in the short term (in theory). Pension funds have 20 to 30+ year time horizons. Hedge funds really don’t fit in a pension portfolio. This is especially true given the high fees and opaqueness of the industry.
So as a hopeful CalPERS pension recipient, I am at peace with shifting money completely out of hedge funds. Now, what must be done to ensure solvency? Perhaps everyone needs to take an equal percentage cut. Everyone includes current retirees, executives, employees, contractors, future retirees, and any other stakeholder I forgot to mention. Perhaps that model of shared sacrifice would require less pain for everyone and lead to sustainability..