Key Takeaways
- • CalSTRS is defending its allocation to alternative assets despite rising equity concentration in its portfolio, citing private equity's consistent outperformance over public market indices as justification for maintaining exposure to these strategies.
- • CalSTRS achieved an 8.5% net return on investments in fiscal year 2024–25, exceeding its benchmark, demonstrating the fund's ability to generate alpha through its alternative investment approach despite market volatility.
- • Both CalSTRS and CalPERS are aggressively pursuing co-investment strategies to reduce fee drag from traditional private equity structures; CalPERS achieved a 47% co-investment ratio in 2023 vintage year capital, directing roughly half of private equity deployment into low or no-fee capital structures.
- • CalSTRS is strategically reallocating resources away from public equities and bonds toward alternative strategies, with the fund reportedly considering shifting approximately $20 billion from traditional fixed income and equity positions to alternative asset classes.
- • Cost reduction remains a critical focus for CalSTRS leadership, with CIO Scott Chan emphasizing the importance of minimizing fees and carried interest payments in private markets while maintaining the fund's private equity allocation as "very important" to long-term performance.
Summary
CalSTRS, one of the nation's largest public pension funds, is making a deliberate case for sustaining and potentially expanding its allocation to alternative assets despite concerns about rising equity concentration in its overall portfolio. The California State Teachers' Retirement System achieved an 8.5% net return on investments during the 2024–25 fiscal year, exceeding its performance benchmark, which underscores the fund's conviction that alternatives remain a critical driver of long-term value creation and return generation.
The fund's confidence in alternatives is grounded in demonstrated outperformance data. CalSTRS' analysis of private equity performance shows consistent alpha generation relative to public equity indices, providing quantifiable evidence that the higher complexity and longer lock-up periods associated with alternative investments justify their continued prominence in the portfolio. However, this strategic positioning comes amid a broader industry challenge: as pension funds increase private market allocations, they face mounting fee burdens from traditional fund structures, which compress net returns delivered to beneficiaries.
To address fee pressure while maintaining alternative exposure, CalSTRS and peer mega-fund CalPERS are shifting their private markets approach through expanded co-investment programs. CalPERS set a target of 40% co-investment allocation in 2023–2024 vintage years and achieved a 47% co-investment ratio in 2023, effectively deploying nearly half of new private equity capital into low or no-fee structures that bypass traditional management fees and carried interest charges. This structural innovation allows the funds to capture private market returns while meaningfully reducing the drag from investment costs.
CIO Scott Chan has articulated that while private equity remains "very important" to CalSTRS' investment success, the fund is not dependent on alternatives alone and is pursuing a balanced approach. CalSTRS is reportedly considering reallocating approximately $20 billion from traditional public equities and bonds into alternative strategies, reflecting confidence in alternatives' risk-adjusted return potential. The fund's sustainable investment program has also been refined, with the public sustainability sleeve merged into the main equity portfolio to streamline operations and reduce administrative complexity.
For institutional investors evaluating their own allocation strategies, CalSTRS' positioning offers a relevant case study: strong net returns and documented PE outperformance can justify maintained alternative exposure, provided funds actively manage fees and pursue cost-efficient deployment mechanisms like co-investments. The broader message from CalSTRS' strategy is that alternatives remain defensible—but only with disciplined cost management and rigorous performance oversight.
The fund's confidence in alternatives is grounded in demonstrated outperformance data. CalSTRS' analysis of private equity performance shows consistent alpha generation relative to public equity indices, providing quantifiable evidence that the higher complexity and longer lock-up periods associated with alternative investments justify their continued prominence in the portfolio. However, this strategic positioning comes amid a broader industry challenge: as pension funds increase private market allocations, they face mounting fee burdens from traditional fund structures, which compress net returns delivered to beneficiaries.
To address fee pressure while maintaining alternative exposure, CalSTRS and peer mega-fund CalPERS are shifting their private markets approach through expanded co-investment programs. CalPERS set a target of 40% co-investment allocation in 2023–2024 vintage years and achieved a 47% co-investment ratio in 2023, effectively deploying nearly half of new private equity capital into low or no-fee structures that bypass traditional management fees and carried interest charges. This structural innovation allows the funds to capture private market returns while meaningfully reducing the drag from investment costs.
CIO Scott Chan has articulated that while private equity remains "very important" to CalSTRS' investment success, the fund is not dependent on alternatives alone and is pursuing a balanced approach. CalSTRS is reportedly considering reallocating approximately $20 billion from traditional public equities and bonds into alternative strategies, reflecting confidence in alternatives' risk-adjusted return potential. The fund's sustainable investment program has also been refined, with the public sustainability sleeve merged into the main equity portfolio to streamline operations and reduce administrative complexity.
For institutional investors evaluating their own allocation strategies, CalSTRS' positioning offers a relevant case study: strong net returns and documented PE outperformance can justify maintained alternative exposure, provided funds actively manage fees and pursue cost-efficient deployment mechanisms like co-investments. The broader message from CalSTRS' strategy is that alternatives remain defensible—but only with disciplined cost management and rigorous performance oversight.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.