BOSTON — Massachusetts' state pension fund is adding portable alpha to its quiver of strategies aimed at closing a more than $10 billion funding gap.
At its Feb. 7 meeting, the $40.2 billion Massachusetts Pension Reserves Investment Management board approved a plan to reduce its domestic equity allocation to 21% of assets, from 26%.
The $2 billion freed up by that reduction will be funneled into low-beta hedge funds of funds, with the alpha produced to be moved onto S&P 500 index returns secured through futures or swaps, Chief Investment Officer Stanley Mavromates said at the meeting.
The portable alpha strategy had been recommended three years before by Stephen L. Nesbitt, then a senior managing director and principal with Wilshire Associates Inc. and now chief executive officer of PRIM's general consultant, Cliffwater LLC, Marina del Rey, Calif.
When PRIM approved a dramatic shift to alternative asset classes from U.S. equities and bonds in 2003, the fund's lack of experience with hedge funds convinced staff not to pursue portable alpha at that time, said Mr. Mavromates. Instead, PRIM tested the hedge fund waters by putting a 5% chunk of its assets into funds of funds in the past 18 months, enjoying good results, he said. PRIM's fund-of-funds investments returned 7.25% for 2005.
Asked by a board member whether adopting portable alpha would amount to walking on the wild side for PRIM, the Cliffwater consultants said a handful of big public funds, including the $28 billion Pennsylvania State Employees' Retirement System, Harrisburg, and the $6.8 billion Missouri State Employees Retirement System, Jefferson City, have already put 20% of their assets into the strategy.
Perhaps $10 billion to $15 billion of public fund money has been put into portable alpha, but the total is growing. "By the time we implement" the Massachusetts allocation, it "will probably be $20 billion," said Mr. Nesbitt.