Like many other pension funds desperate for higher returns, the $63.5 billon North Carolina Retirement Systems, Raleigh, is significantly reducing its equity allocation and clearing the way to put up to an additional 9% of plan assets into alternative assets.
Another casualty of the new asset allocation is a separate allocation to hedge funds.
A source familiar with the new allocation, who asked not to be identified, said some of the pension fund's existing hedge fund managers would be retained while others might be terminated. In addition, the source said, it's likely some of the equity and real estate portfolio managers would be terminated.
“There is a concern that there may be too many managers in real estate and equities, and that (North Carolina) should phase out those who aren't doing so well and give more money to those who are performing better,” this source said.
Like staff at many other corporate and public pension plans — including the $47.7 billion Virginia Retirement System, Richmond — the investment staff at the North Carolina fund is incorporating hedge funds into the classes in which they best fit (Pensions & Investments, Nov. 16).
The new asset allocation, presented to the pension fund's investment advisory committee late last month, cuts global equity by eight percentage points to 40.5%, keeps fixed income at 38%, raises real estate to 8% from 6%; hikes private equity to 4.5% from 3.5%, raises inflation-protection and credit strategies by a total of six percentage points to 4.5% each from 1.5% each; and eliminates a separate 1% allocation to hedge funds.
According to a document outlining the new allocations, the changes are aimed at reducing risk and outperforming the system's 7.25% actuarial rate of return.
As of Sept. 30, 2009, NCRS had just under 1% of plan assets, or $636 million, invested in hedge funds of funds, according to the most recent data provided by the fund for P&I's annual directory of largest pension funds.
In fact, that hedge fund total was down significantly from the $952 million the fund reported as of Sept. 30, 2007.
Janet Cowell, state treasurer and the pension fund's sole fiduciary; Rodney Overcash, portfolio manager, and Ronald Funderburk, investment analyst, did not return phone calls and e-mails by deadline, so it's not clear how big North Carolina's investment in hedge funds will be.
But at press time, Heather Strickland, spokeswoman for Ms. Cowell's office, e-mailed a statement from Shawn Wischmeier, chief investment officer: “We have the statutory authority to utilize private equity and hedge fund types of investments in our credit and inflation-protection buckets. This authority was granted in 2009 by the (Legislature) and we are exploring our options.”
He added: “With this authority, NCRS has the ability to utilize hedge funds in the credit (up to 5%) and inflation-protection strategies (up to 5%). Hedge funds ... can be utilized in either allocation... Whether or not to utilize a hedge fund structure will depend on the investment opportunity.”
The source knowledgeable about the new allocation said investment staffers were attempting to implement as much of the new allocation as possible, but some might have to be approved by the state Legislature.
In another e-mail, Ms. Strickland did not specify how much of the total of $5.7 billion now dedicated to credit and inflation-protected strategies will be invested in hedge funds.
Previously, the system's investments in private equity and hedge fund investments were lumped together in an alternatives portfolio barred by state law from exceeding 5% of system assets, Ms. Strickland said in her e-mail. Under the old asset allocation, private equity and hedge fund allocation targets totaled 4.5%.
“The ability to use hedge funds in allocations outside of the 5% alternatives allocation was made possible with the addition of the credit and inflation-protection allocations created by the Legislature in 2009,” Ms. Strickland wrote.
Investment officers are already at work, reviewing “credit-focused hedge funds” with which to “possibly invest in the future,” according to Ms. Strickland. “They are currently requesting information from a broad base of these managers to find the best long-term fit within the credit strategies portfolio,” she wrote.
Ms. Strickland said no formal plans have been made to implement the allocation changes. Staff members “are in ongoing discussions with hedge fund managers addressing our current allocation to alternatives. Additionally, staff will evaluate new opportunities within the credit and inflation asset classes.”
In a separate e-mail response to questions, Ms. Strickland said: “The length of implementation will vary depending on the asset class as these changes will take place over a period of years.”