SACRAMENTO, Calif. — CalPERS will create new pools of long-short enhanced equity index managers and global fixed-income managers.
The long-short equity portfolios are considered a major new initiative by the $204.2 billion California Public Employees' Retirement System. CalPERS officials hope to obtain better returns at a high information ratio. No dollar amount has been allocated to the new program, but assets will likely come from the fund's $55 billion internally managed domestic equity portfolio.
The system's investment committee has been discussing adding long-short enhanced index managers since November. While earlier discussions involved both domestic and international approaches, staff decided to focus solely on domestic equities initially, disappointing some international equity managers. The investment committee approved the RFP at its Feb. 14 meeting.
These portfolios will relax the fund's long-only constraint and will typically be invested in strategies that are 130% long and 30% short or 110% long and 10% short, said Mary Cottrill, senior portfolio manager at CalPERS. While CalPERS will cap each manager's tracking error at 6%, in reality they may be lower, more around the 4% mark.
CalPERS officials found the new strategies might reduce the fund's total risk while increasing its active risk.
A test of holdings of an actual 130% long/30% short portfolio "would have little to no effect on total and active risk of the fund, depending on the amount of assets allocated," according to a staff memo to the board. A $2 billion allocation to such strategies would reduce the fund's total risk while increasing active risk, the memo said. A $10 billion allocation, however, would significantly increase active risk for the U.S. equity portfolio, while modestly increasing the overall risk of the total fund.