(Bloomberg View) -- From the “Here We Go Again” files:

Yet another big pension fund has decided, despite theoverwhelming evidence to the contrary, to engage in higher-risk,higher-cost investing. One day, this might end well, but history isreplete with an almost-unbroken string of examples where ithasn't.

You might have missed the Wall Street Journal article during theLabor Day bustle reporting how the California State Teachers’ Retirement System (oftenreferred to as Calstrs), the nation’s second-largestpension fund with $191 billion in assets, was considering anaggressive move into both market timing and alternativeinvestments:

Top investment officers of the California State Teachers’Retirement System have discussed moving as much as 12 percent of the fund’s portfolio—ormore than $20 billion—into U.S. Treasurys, hedge funds, and othercomplex investments that they hope will perform well if marketstumble, according to public documents and people close to thefund.

Its holdings of U.S. stocks and other bonds would likely declineto make room for the new investments.

We can't help but be astonished by this development, given allwe know about almost every chief investment officer's ability totime markets or the typical investment committee's ability toselect hedge funds or other alternatives.

My wife is a teacher, and she and her colleagues often ask mequestions about their self-directed 403(b) retirement accounts.

Perhaps I can be of some assistance to those educators on theother side of the country who might be curious about how theirretirement funds are being managed.

So here are questions those California teachers should feel freeto ask the managers running the Calstrs about their newinvestments:

1) You are considering moving a substantial amount of assetsinto U.S. Treasuries at a time that rates are near record lows, andthe Federal Reserve is considering raising interest rates for thefirst time in more than nine years. Does this move mean you believerates are going lower? Second, if you believe rates are goinghigher, won’t that have a negative impact on the value of theseholdings?

2) If you are moving into Treasuries as a defensive measureagainst a decline in equities, what basis do you have for believingyou can A) get back into stocks at the correct time once they havereached bottom, and B) what makes you think you will have therequisite discipline to buy into equities and sell bonds whenthings will be looking especially gloomy? Do you have any historyor a track record of this sort of market timing?

3) You seem to be implying that future returns are going to belower than they have been. If that is the case, does it really makesense to move toward more expensive, higher-fee asset classes? Ifyou expect returns to be lower, why aren’t you moving towardlower-cost investments?

4) Are you familiar with any index of alternative investments(hedge funds, private equity and venture capital) that offers anobjective measure of returns? Do you know of any indexes thatinclude mandatory performance reporting? Aren’t the industry-wideperformance indexes you cite filled with survivorship bias, andcomposed of self-reported managers who don’t disclose quarters oryears when they underperform?

5) Calstrs CIO Christopher Ailman was quoted in the WSJ articleas saying “The recent market volatility has been painful.” In whatway has the volatility been painful? What is it about a 15 percentdecline following a 206 percent, six-year rally that is eitherunusual or a source of discomfort?

6) Speaking of which: How unusual are 10 percent to 20 percentcorrections? Is this something truly aberrational or is it just themarkets going up and down as they so often do?

7) The New York Times recently reported that hedge funds havefailed to beat a 60/40 mix of stocks and bonds every single yearsince 2002, and they’re on track to fall short again this year.They have underperformed their benchmarks for one, three, five, 10and 20 years. And Bloomberg Businessweek noted that “Hedge FundsAre for Suckers.” Given this, why do you want to move a substantialpercentage of our assets into hedge funds?

8) The Wall Street Journal also reported that Calstrs CIO Ailman“hopes a move away from certain stocks and bonds could help stubout heavy losses during future gyrations. This could include movingout of some U.S. stocks as well as investment- grade bonds.” Whatdid the fund do in the 2000 crash? Or 2008 crash? Mr. Ailman, whatdid you learn from these experiences?

9) Here's a related question, thanks to Larry Swedroe of BAMAlliance: Do hedge funds really hedge?

10) Speaking of hedging: The average age of California teachersis 43.1; we have more than two decades or longer until we will bedrawing on these funds in retirement. Why do we need to hedge?

Thank you for your assistance. We look forward to youranswers.

This column does not necessarily reflect the opinion of theeditorial board or Bloomberg LP and its owners.To contact theauthor of this story: Barry L Ritholtz at [email protected] contact the editor responsible for this story: James Greiff [email protected]

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