The Board recognizes that bearing prudent levels of compensated investment risk is critical in meeting the Fund’s long-term return objectives, which are in turn essential to the sustainable provision of adequate benefits. Indeed, while risk is typically defined in terms of market volatility or potential for loss, risk for the System is also defined more broadly to include the probability of not meeting its primary investment objective, which to enable the provision of promised benefits in perpetuity. To this end, the investment program seeks (1) to identify the key sources of uncertainty with the greatest potential impact on Fund performance and (2) to measure, monitor and manage those risks in view of the level of compensation that has been realized and is expected for bearing those risks.
Diversification across a variety of asset classes in conjunction with a strategic rebalancing process is the primary means of managing investment risk. The Board also takes several steps throughout the investment process to identify, measure, and report on investment risk at a variety of different levels. A number of key risks are also identified and detailed in the internal procedures of the Investment Staff.