South Carolina Retirement System Investment Commission over the next nine months will restructure the $5.5 billion hedge fund portfolio it oversees for the $27.3 billion South Carolina Retirement Systems, Columbia.
Under a new asset allocation effective July 1, the target for hedge funds will be reduced to 15% of total assets from 20% and the funds themselves will be recategorized, said Hershel Harper Jr., chief investment officer of the commission. The 5% of assets freed up by the reduction will be moved to other asset classes.
The allocation to a dedicated hedge fund component was increased to 8% from 5%. The dedicated hedge fund portfolio will include only hedge funds that exhibit low correlation and low beta compared with traditional stocks and bonds, including credit. Strategies sought for the hedge fund asset class likely will include global macro, market-neutral and managed futures strategies.
The new allocation will be less correlated to other asset classes in the South Carolina portfolio and will feature “a lower volatility and lower expected return than hedge fund programs that are heavily reliant on equity beta,” according to a report from Hewitt EnnisKnupp, RSIC's investment consultant.
Some of the hedge fund investments from the fund's $3.9 billion portable alpha portfolio, such as Bridgewater's Pure Alpha Fund and D.E. Shaw Group's Composite fund, might be moved to the low-correlation hedge fund asset class because of their return characteristics, Mr. Harper said.
The portable alpha portfolio, which accounted for 15% of plan assets, is in the process of being eliminated. Mr. Harper said between $800 million and $1 billion remains to be liquidated.
The new hedge fund policy also allows up to 7% of plan assets to be invested in hedge funds with higher beta to traditional asset classes. The new structure moves those hedge funds into the asset classes to which they are most similar, including equity and fixed income.
A long/short fixed-income strategy managed by Loomis Sayles, for example, might be included in the system's traditional fixed-income portfolio, Mr. Harper explained.
Mr. Harper said manager searches to build out the dedicated hedge fund portfolio are likely. He did not have a date yet for when RFPs would be issued, but expects hedge fund portfolio restructuring to be done by March 31, 2014.