A consultant has prepared an investment proposal for a very large pension fund with $40bn of assets which currently has allocations of 55% to equities, 45% to government bonds. The key points of the consultants proposal are: The fund should reduce the allocation to government bonds to zero and invest this 45% in hedge funds. The 45% allocation to hedge funds should comprise of 10% Fixed Income Arbitrage, 15% Convertible Arbitrage, 20% Distressed. To ensure diversification the $18bn allocation to hedge funds should be split between 180 funds ($100m in each). The consultant has based his analysis on a database of funds which is free from any major biases, used mean/variance analysis to arrive at the weights and estimates that the proposal would significantly increase the pension funds Sharpe ratio. Briefly describe any issues you see with this proposal drawing on your knowledge of both the academic literature and empirical observations.