Pennsylvania State Employees’ Retirement System, Harrisburg, will continue to review its holdings of swaps, as the derivatives investments remain under selling pressure amid the global market sell-off, said Robert Gentzel, spokesman at the $27 billion system.
“We have been dialing back the exposure to swaps in this environment. We have already not been renewing them and some swaps (contracts) have been terminated early. There’ll continue to be some adjustments in terms of lessening this swap exposure,” Mr. Gentzel said in an interview.
The fund has made no decision on dropping swaps entirely. “There is no final determination,” he said.
In the first quarter of 2007, PennSERS’ swap portfolio based on the S&P 500 and MSCI EAFE indexes peaked at $8.6 billion, Mr. Gentzel said, adding that PennSERS currently holds only about $2 billion of the derivatives securities.
Mr. Gentzel said the issue was brought up Dec. 3 at a meeting of the system’s 11-member board.
“There was an overview of capital markets, including all asset classes, and it was bad all over. There was a review of the quarterly performance and a discussion of the fact that markets have deteriorated,” Mr. Gentzel said. “Swaps were part of the overall discussion. … The losses were not because of the use of swaps per se, but because (underlying) equity markets are down.”
In 2003, the system adopted portable alpha strategies as a way to increase return; the system added $500 million in returns from the strategy through 2006, Mr. Gentzel said, but when the markets fell apart, the strategy forced the system to cover losses on its swaps.
