CalPERS staff recommended extending its currency overlay program to its entire international exposure, setting a hedge ratio of 15%. While agreeing with the extension of the program, Wilshire Associates, CalPERS consultant, sharply differs on how the hedge ratio would be set.
Staff at the $179 billion California Public Employees Retirement System, Sacramento, proposed expanding the currency program to cover all asset classes that have non-U.S. dollar exposure. Traditionally, the overlay program covered only the funds international equity program. Under the proposal, it also would cover global fixed income, real estate, private equities, hedge funds and other asset classes.
In a memo to the investment committee, CalPERS staff recommended dropping its fixed currency hedge ratio to 15% from 25%. But in a Dec. 1 letter to Anne Stausboll, CalPERS acting interim CIO, Michael C. Schlachter, Wilshire managing director and principal, criticized CalPERS monolithic methodology. Instead, he wrote the hedge ratio should be calculated for each asset class and possibly for each underlying portfolio and then the results should be aggregated to calculate the best overall hedge ratio for the entire fund.
The fundamental differences between the methodologies proposed by CalPERS staff and Wilshire, Mr. Schlachter wrote, was replacing the existing hedge ratio with a new one based solely on past performance and treating currency exposure uniformly as risk that needs to be hedged.
He added that the staff method does not consider whether the currency hedge qualitatively fits with the nature of the underlying investment programs and does not consider whether the current market environment or CalPERS investment structure favors a different hedge ratio than that which is simply the most optimal for minimizing return variance.