CalPERS officials have proposed extending their currency hedge to include all asset classes instead of just international equities in a move that is considered very unusual.
In doing so, they propose putting in place a 15% hedge across the total fund, replacing the 25% applied just to international equity exposure.
Brad Pacheco, a CalPERS spokesman, said relatively few U.S public funds have currency overlay programs and even fewer use the strategy across multiple asset classes. He said it's possible CalPERS is the only pension fund to include all asset classes.
As of Oct. 31, CalPERS' international equity portfolio totaled $35.9 billion. Two external managers, Pareto Investment Management, London, and State Street Global Advisors, Boston, ran currency overlays of $2.5 billion and $2.3 billion, respectively, as of the same date. The remaining overlays are managed internally. CalPERS has a total of $7.5 billion in overlays.
Officials at Pareto and SSgA did not return calls seeking comment on CalPERS' proposal.
Last week, CalPERS' investment committee adopted the proposal on a temporary basis until mid-2009, when fund officials expect to complete a “mini” asset allocation study necessitated by the continuing market turmoil. Meanwhile, CalPERS' staff and its consultant, Wilshire Associates Inc., Santa Monica, Calif., will try to resolve a contentious debate over how the hedge should actually be structured.
Nobody at CalPERS or Wilshire is arguing that extending the hedge isn't a smart play. What they are debating is how to place their bets when it comes to calculating the hedge ratios themselves — and the dilemma boils down to a fundamental dispute over whether to retain the static ratio supported by CalPERS staff or replace that with a dynamic approach championed by Wilshire.
In approving the new policy, CalPERS brushed away 16 years of tradition limiting its hedging solely to developed-market equity exposures.
Fund officials substantially increased the target unhedged foreign currency exposure to 42% from 26% with the asset mix adopted in late 2007, upping non-U.S. allocations in public equities, real estate, private equity and inflation-linked bonds.
The new policy will result in more accurate management of the program and better measurement of results, permitting more comprehensive reporting of both hedged and un-hedged risk and return on the entire fund, according to a staff memo to the investment committee.