Neither Mr. Robertiello nor Mr. Ishii returned phone calls for comment for this story.
The pension fund board's investment committee was informed in closed meetings during March and April that the cuts were being made, said two sources familiar with the discussions.
Other sources said portfolio managers for the absolute-return strategy made phone calls to all 13 CalPERS hedge fund managers in the past several weeks, telling them about the reduction. Three hedge fund managers will be terminated, and the remaining 10 will see their allocations cut.
The process of redeeming hedge fund assets varies among managers and can take several months. But by September, the sources say, the CalPERS hedge fund program will be reduced to around $2.5 billion.
In addition, the hedge funds-of-funds program is being reduced to two funds of funds from five, the sources said. Mr. Robertiello already has terminated four other hedge funds-of-funds managers during his nearly two years at CalPERS.
The hedge funds-of-funds segment has been a particular drag on performance, the sources said. They said that portion eventually will be cut to 15% to 20% of the portfolio from about 30%.
It is unclear why Mr. Ishii decided to reduce allocations while the program review is underway. The hedge fund program has underperformed in the past, but performance has improved under Mr. Robertiello.
The hedge fund portfolio returned 9.2% for the year ended Dec. 31, compared to the CalPERS custom hedge fund benchmark of 5.3%, CalPERS statistics show. The custom benchmark is the one-year U.S. Treasury note plus 5%.
But for the three-year period, the hedge fund portfolio returned an annualized 3.3%. vs. 5.4% for the benchmark. For five years, the hedge fund portfolio returned an annualized 6.2% and the benchmark, 5.6%.
The hedge fund program over the 10 years ended Dec. 31 returned an annualized4.9%, compared to the benchmark's 7.3% return.
Sources say Mr. Ishii was appointed to review the hedge fund program by acting Chief Investment Officer Theodore “Ted” Eliopoulos in early January, right after Mr. Eliopoulos took over for Joseph Dear, who was ill at the time. Mr. Dear died on Feb. 26.
Around the same time, Mr. Robertiello, who had reported directly to Mr. Dear, began reporting to Mr. Ishii.
Mr. Dear supported an expansion of the hedge fund program, but Mr. Ishii has been a key opponent of the program. At a CalPERS asset allocation workshop in November, Mr. Ishii advocated scrapping the program, saying the risk of investment losses was too great.
Tense closed-door reviews have occurred twice monthly since February, sources said, with Mr. Ishii dominating the meetings and repeatedly attacking the hedge fund program. They said Mr. Ishii said he plans to take about $2.5 billion from the hedge fund program and redirect it to fixed income.