CalSTRS will consider expanding its currency overlay program, including eventually hiring one or more external currency overlay managers, according to a staff memo to the investment committee of the $126.9 billion pension fund.
Active international equity managers, which run half of the fund's $31 billion in international stocks, can actively hedge only against the dollar's rise, but they lose money when the dollar declines. Internal staff runs a currency hedging strategy for the passively managed half of the portfolio.
A review by Callan Associates recommended expanding currency management to cover foreign private equity and real estate. As of Sept. 30, the fund's foreign private equity exposure was about $615 million. The California State Teachers' Retirement System, Sacramento, recently committed 74 million euros to non-U.S. real estate. Callan also noted that there are implementation issues in hedging illiquid assets, such as lags in valuations.
Callan also recommended that CalSTRS add use of futures contracts and longer-dated forwards as hedging instruments and be allowed to invest in the Australian dollar. These recommendations will be reviewed at CalSTRS' April 7 investment committee meeting.
Separately, staff, backed by Callan and Pension Consulting Alliance recommended the fund seek ways of generating alpha from its currency program. Callan suggested that CalSTRS modify its current hedging range to make bets for and against the dollar, allow a limited amount of cross hedging and hire one or more currency overlay specialists. Staff expects to make more detailed recommendations on alpha-producing strategies at the committee's July 2005 meeting.