HARRISBURG, Pa. — The U.S. public pension plan with the biggest allocation to hedge funds just doubled it.
Trustees of the $22.7 billion Pennsylvania State Employees' Employees' Retirement System, Harrisburg, last week approved new asset allocation targets, including a 20% exposure to absolute return strategies. The old target had been 10%.
PennSERS' total allocation to absolute return strategies will be almost $5 billion. Currently, about $3.1 billion is in the asset class, three percentage points above the old 10% allocation.
The pension fund's strategy is to invest in funds of funds. No new managers are expected to be hired. Funding for the doubled allocation will come from a reduction in a Standard & Poor's 500 index fund.
Peter Gilbert, chief investment officer, said the goal is to achieve increased portfolio diversification in an era of diminished expected returns. The other targets are:
-- 30% for domestic equities, including absolute return, down from 33%;
-- 13% for international equities, down from 15%;
-- 4% for emerging markets equities, up from 3%;
-- 15% for domestic core fixed income, down from 20%;
-- 4% for emerging markets debt, up from 0.5%;
-- 4% for a new allocation to Treasury inflation-protected securities;
-- 5% for high-yield bonds, up from 4.5%; and
-- 3% for commodities, from 2%.
Alternatives — private equity, venture capital and distressed securities — remain at 14%; the 8% real estate allocation also is unchanged.
Pension fund officials will search for money managers only for the new TIPS and expanded emerging markets allocations.
The plan is to reach the new target allocations within five years, Mr. Gilbert said.
Rocaton Investment Advisors LLC, Darien, Conn., the fund's general investment consultant, provided the lion's share of outside assistance in conducting the asset-liability study and modeling the new target allocations. Rocaton was assisted by the fund's specialist consultants Cambridge Associates LLC, Boston, for hedge funds; The Townsend Group, Cleveland, for real estate; and Pension Consulting Alliance Inc., Encino, Calif., for special projects.
Mr. Gilbert said the fund will continue to use a fund-of-funds approach and will allocate the additional assets to existing managers if negotiations proceed satisfactorily. The managers are: Pacific Alternative Asset Management Co., Irvine, Calif., which now runs $622.6 million for the fund; Morgan Stanley Alternative Investment Partners, New York, $618.8 million; Mesirow Advanced Strategies Inc., Chicago, $619.3 million; and Blackstone Alternative Asset Management, New York, $853.4 million.
While most investors would consider these firms to be hedge fund-of-funds managers, Mr. Gilbert does not. He considers the definition of a hedge fund to be too imprecise to describe his fund's approach. Regardless, the Pennsylvania fund's absolute return exposure is huge, especially for a public pension fund.
The median strategic allocation to hedge funds by all types of North American institutional investors in 2003 was 5% and is forecasted to be 7.5% in 2005, according to a recent joint survey of large institutional investors by Goldman Sachs Co. Inc., New York, and Russell Investment Group, Tacoma, Wash.