After “cutting its crash-hedging program as part of a cost-curtailment effort and because of a lack of understanding of how tail hedges work,” the California Public Employees’ Retirement System (CalPERS) missed a payout of more than $1 billion when markets crashed in March. This according to a recent article in Institutional Investor.

Last October, facing mounting pressure from investors worried about the bull market ending, CalPERS decided to curtail the costly hedging initiative which the article describes as “similar to life insurance.” The crux of the issue, it explained, was a lack of understanding of the cost of the program in which investors pay a small amount each year for a large potential payout “if the event that is being insured against occurs.” But many investors viewed the cost more as a management fee than an insurance premium.

CalPERS’ chief investment officer Ben Meng stands by the decision: “We terminated explicit tail-risk hedging options strategies because of their high costs, lack of scalability, and the fact that there are better alternatives available to CalPERS.”

The article cites one source that said the tail-hedge program “may have been swept up in a purge of many inefficient active manager programs. But the program was never meant to be under the mandate for these other programs. By design, it loses a little bit of money during good times with a huge benefit during a severe drawdown in equities.”