SACRAMENTO, Calif. — CalPERS wants to build an alpha farm.
On Dec. 13, the board of the $177.8 billion California Public Employees' Retirement System, Sacramento, will discuss an ambitious plan to create an internal incubator for alpha strategies that eventually could absorb billions of dollars from the pension fund's $110 billion global equity program.
Staff proposes a $500 million allocation for a new internally managed opportunistic fund that would incubate up to five different alpha strategies, including both long-only and hedge funds. Assets to fund the quantitatively driven strategies likely will come from CalPERS' $48.9 billion internally managed domestic equity index fund.
The incubator would support a move to build up internal management at CalPERS. "The economics of managing money internally vs. externally are very compelling," said Christianna Wood, senior investment officer.
Public pension and endowment funds rarely develop a series of proprietary strategies — in large part because they have to compete with private-sector salaries.
Harvard Management Corp., Boston, which runs Harvard University's $22.6 billion endowment fund, has received considerable flak over its high pay for internal managers that run proprietary strategies. The C$79 billion (US$64.7 billion) Ontario Teachers' Pension Plan, Toronto, also has developed numerous in-house investment strategies, but without a pay brouhaha marring the results.
Models for some strategies that might be included in CalPERS' alpha incubator have been developed but are not yet running money. They include two quantitative factor models and a relative-value trading strategy. Two market-neutral strategies now in development also are candidates for the incubator, Ms. Wood said. All would be subject to tight risk controls.
If approved by the board, the incubator fund would give a tremendous boost to CalPERS' growing internal portfolio management staff. Eric Baggesen, a senior portfolio manager, joined CalPERS recently from SSgA, while Dan Bienvenue, a portfolio manager, joined from Barclays Global Investors' Sacramento office, which was closed earlier this year. Plans are to add two more investment officers in the fiscal year starting July 1.
A staff memo to the CalPERS board notes the fund's "internal strategies have been among our most consistent and stellar performers."
In particular, a $900 million internally managed enhanced equity index fund run by portfolio manager Chris Doffing has outperformed its customized Wilshire 2500 benchmark by an annualized 1.6 percentage points over the past three years. The strategy's information ratio — a measure of risk-related returns — was 1.2 during that period. For the 12-month period ended Sept. 30, the information ratio has been an off-the-charts 2.6.