CalPERS will use futures as part of its absolute-return strategy instead of making an absolute-return allocation to increase returns, according to Wayne Davis, spokesman for the $227 billion system.
The California Public Employees’ Retirement System’s investment committee opted to follow a staff proposal over one from its general consultant, Wilshire Associates, which had recommended that the system add a 2.5% allocation to hedge funds.
In July, the Sacramento-based system moved its absolute-return strategy to the direct responsibility of Joe Dear, chief investment officer, from its global equities portfolio because of “the multistrategy nature of the program,” according to a staff memo to the investment committee. As part of an analysis of the future role of absolute return in CalPERS’ portfolio, staff recommended that instead of creating an absolute-return allocation, the system buy equity market index futures. Staff stated that this approach would enhance the entire portfolio’s return.
Wilshire strongly objected to the staff’s approach, saying in a memo to the committee that it added too much risk.
Wilshire said the approach will change the absolute-return strategy to a “‘portable alpha’ program, where the ‘alpha’ (outperformance/underperformance) from hedge fund investments is combined with stock index futures to create a portfolio that tracks the performance of the stock market, plus staff’s skill at adding value through manager selection,” the memo contended. “This was the approach staff implemented, briefly, that compounded the losses in the portfolio through the market downturn in 2007 and 2008.”
Separately, CalPERS committed $100 million to Breton Hill Eureka Fund, an absolute-return strategy, according to information on the system’s website.