CalPERS staff wants to create an internally managed alpha generator that eventually could absorb significant chunks of the pension fund's $110 billion global equity program. In a proposal to be considered Dec. 13 by the $177.8 billion California Public Employees' Retirement System's investment committee, staff recommends making a $500 million allocation to a new opportunistic fund for global equity that would incubate up to five strategies internally. Current strategies being developed include quantitative factor models and a relative-value trading strategy, according to a staff memo.
Staff would incubate each strategy for at least a year, and the investment committee would have to approve each strategy's expansion into a stand-alone fund. Leverage, derivatives or short-selling would be considered, and programs could cover domestic and international strategies. Acceptable alpha-generating strategies would have to significantly affect the fund's performance and have information ratios that could be maintained when larger sums of money are invested.
The staff memo warned that issuing RFPs for the strategies "will undermine (their) successful development" because CalPERS requires flexibility and agility in implementing the program. The Sacramento-based system has encountered long delays in implementing programs that have gone through the RFP process.
Rosalind M. Hewsenian, managing director at consultant Wilshire Associates, supported creating the opportunity fund but urged that the board establish "a more uniform treatment" of such funds through all asset classes.
Separately, CalPERS is considering revamping its $6.9 billion currency hedging program. According to a staff memo, staff wants to give returns equal importance to risk reduction in the program because of new evidence that currency can provide consistent alpha. Staff also wants to set the hedge ratio to cover all the asset classes in which CalPERS invests overseas — equities, real estate and fixed income — instead of international stocks only. And the staff wants to make tactical bets on the hedge ratio, reflecting the changing relationship of forward costs and currency correlations.
Staff also recommended renewing for one year the contracts of currency managers Pareto Partners and State Street Global Advisors. Pareto and SSgA overlay $5 billion and $1.9 billion, respectively, in international stock exposure. Wilshire supports the contract renewal.