The $39.4 billion Massachusetts Pension Reserves Investment Management board and the $2.6 billion Fire & Police Pension Association of Colorado moved last week to dismantle the beta portions of their portable alpha programs, while maintaining at least some of those programs' hedge fund exposure.
Both funds effectively opted to purge from their portfolios the portable alpha-related leverage that proved so painful following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc., when the resulting plunge in equity markets forced the funds to cough up cash to cover margin calls for their equity beta overlays.
In an interview, Stan Mavromates, chief investment officer of the Massachusetts fund, said PRIM executives had to find $1.2 billion in 2008 alone to top up its portable alpha overlays, selling fixed-income and indexed equity holdings to come up with the needed cash.
The hedge fund-of-funds managers on the alpha side of MassPRIM's program also proved less resilient to the market sell-off than hoped, losing 15.67% for the 12 months through June 30. Combined with the steep losses on the beta side, MassPRIM's portable alpha allocation — which accounts for 6% of the total portfolio — lost 46% of its value for the 12-month period, for an annualized decline of 18.6% since the program's Aug. 31, 2006, inception, Mr. Mavromates noted.
“Portable alpha as a strategy here is dead,” said Michael Travaglini, executive director of Boston-based PRIM.
PRIM will move to unwind the beta portion of its program — where Russell Investments currently provides $1.9 billion of exposure to the Russell 3000 index — by the end of August, Mr. Mavromates said. On the alpha side, PRIM's investment committee recommended maintaining the program's entire 6% hedge fund-of-funds exposure, but the board voted to split the allocation, adding half to an existing absolute return-hedge fund allocation of 5% and half to the fund's 46% global equity allocation.
J. Scott Simon, CIO of the Greenwood Village, Colo.-based fire and police fund, said his fund's staff will recommend that the board terminate the portable alpha program, launched in November 2004, that now accounts for 5% of the total portfolio.
Like MassPRIM, Colorado's portable alpha program experienced a painful cash flow drain in late 2008, aggravating a 47% plunge in the value of the program's assets for the year that left returns since inception trailing its benchmark by an annualized 3.2%, Mr. Simon said.
He said the portable alpha program's 5% absolute return-hedge fund exposure is likely to be rolled into a new absolute-return category the board approved recently. An allocation to absolute return of as much as 10% of total assets could be approved at the board's September meeting, he said.
The decisions by MassPRIM and the Colorado fund follow similar moves by other public pension funds this year. In March, the board of the $55 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, voted to “dismantle the portable alpha overlay program,” while parking the alpha side in a new “absolute return” allocation, according to spokeswoman Evelyn Tatkovski. The absolute-return allocation comes to 7.5% of total assets.
Likewise, the $22.8 billion Pennsylvania State Employees Retirement System, Harrisburg, has “effectively dismantled” its portable alpha program, spokesman Robert Gentzel said in a recent interview. Beta overlays, which peaked at $8.6 billion in 2007, now stand at $800 million, with no plans to replace them as contracts expire, Mr. Gentzel said. While the hedge fund-of-funds allocation stood at a substantial $5.7 billion as of June 30, that should decrease over time as the allocation is “resized” in accord with the recent decline in the overall portfolio, he said.