Portable alpha, a strategy that garnered pension fund fans by leveraging a dollar of assets into two dollars worth of market exposure, ended the past year down but not out.
Proponents argue the strategy — or at least its more conservative iterations — may yet reclaim some of the buzz portable alpha enjoyed in the run-up to the recent financial crisis.
As of Sept. 30, 2009, big U.S. pension funds reported $23.16 billion of assets in portable alpha strategies, off 43.5% from the year before, according to Pensions & Investments' latest survey of the top 200 U.S. retirement plans.
The year-earlier figure of $41 billion, meanwhile, itself represented a 19% drop from the peak of $50.3 billion reported as of Sept. 30, 2007.
Those declines reflect continued fallout from 2008 and early 2009, when portable alpha programs that used futures or overlays to get beta exposure to stocks while tapping alpha sources such as hedge funds of funds faced a double whammy.
Declines of more than 40% for U.S. and international stock indexes left plan executives scrambling to come up with hundreds of millions or even billions of dollars to cover margin calls on their beta exposure, at a time when plunging valuations and illiquidity were limiting their ability to rustle up the needed money.
On the alpha side, too many strategies offered under the rubric of “absolute return” turned out to be anything but, suffering surprisingly big losses of 15% to 20%.
That painful combination prompted a number of plans to dismantle multibillion-dollar programs during the survey period, including the Pennsylvania State Employees' Retirement System, which had $5.2 billion in the strategy as of Sept. 30, 2008, and the Pennsylvania Public School Employees' Retirement System, with $4.6 billion.
The Massachusetts Pension Reserves Investment Management Board, which reported $2.45 billion in residual portable alpha assets as of Sept. 30, was in the process of unwinding its program following a board vote in August to end it.
For Boston-based MassPRIM, which had to spend more than $1 billion topping up its beta overlays during the turmoil of 2008, portable alpha is “definitely out of the playbook,” said Michael Travaglini, the $41.76 billion state fund's executive director.
That's partly a timing issue, as MassPRIM's program only had a year or so of positive markets before the financial crisis struck, said Mr. Travaglini. For boards of trustees with programs in place for 10 years or so, 2008 may not necessarily have changed their thinking, he said.
Portable alpha served Pennsylvania SERS well for more than six years, but proved flawed under extreme economic conditions, with the hedge funds of funds employed unable to avoid losses or fully provide the liquidity needed to settle swap contracts, said Robert Gentzel, spokesman for the $25.6 billion Harrisburg-based system. These weaknesses were serious enough that PSERS executives wouldn't contemplate a return to a portable alpha strategy based on that model, he said.