Skip to main content
MENU
Subscribe
  • Login
  • My Account
  • Logout
  • Register For Free
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • CIOs
    • Consultants
    • Defined Contribution
    • ESG
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Private Credit
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • Special Reports
    • Washington
    • White Papers
  • International
    • U.K.
    • Canada
    • Europe
    • Asia
    • Australia - New Zealand
    • Middle East
    • Latin America
    • Africa
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2024
    • Eddy Awards
  • Resource Guides
    • Active Thematic Global Equities
    • Retirement Income
    • Fixed Income
    • Pension Risk Transfer
    • Pooled Employer Plans (PEPs)
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
  • Print
Breadcrumb
  1. Home
  2. ASSET OWNERS
March 03, 2014 12:00 AM

CalPERS will abandon passive currency hedging

22-year-old program contributed nothing to fund's bottom line

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Brendan Hoffman/Bloomberg
    Eric Baggesen said with passive hedging, net returns increased by only two basis points from the start of the program in June 1992 through June 2013.

    CalPERS is axing its 22-year-old passive currency hedging program because it has had almost no effect on the returns or volatility of the $282.5 billion pension fund.

    In its place, the California Public Employees' Retirement System, Sacramento, will do active currency hedging, but has not set a start date.

    The decision by officials of the nation's largest defined benefit plan to change course is contained in the fine print of a new asset allocation plan approved by CalPERS' board on Feb. 18.

    That plan reduces global equity and private equity allocations, while it increases fixed-income and real estate allocations. But it also means CalPERS no longer will take a unilateral bet to protect currency fluctuations from hurting overseas investments.

    The 15% passive hedge position placed on all non-U.S. investments — which make up 44% of the pension fund's total assets — will be lifted as part of the new asset allocation that is effective July 1.

    Eric Baggesen, senior investment officer for asset allocation and risk management, said in an interview that under the passive currency hedging program, net returns increased by an annualized two basis points from inception in June 1992 through June 30, 2013. Return volatility was reduced by nine basis points during the same period.

    Mr. Baggesen called the results ”statistically insignificant.”

    The 15% hedge was adopted in December 2008. Before then, CalPERS had a 25% passive hedge but only on its foreign equity portfolio. The data provided by CalPERS covered both periods.

    “What it really tells us is that we went through all this motion for over 20 years and basically ended up in the same place we started from,” Mr. Baggesen said. “When you're a very long-term investor, what's the point?”

    Mr. Baggesen said that prior to 2008, the U.S. dollar had been declining relative to key foreign currencies, so the hedge wasn't paying off. Since 2008, he said, the dollar had been strengthening and the optimal hedge rate was growing larger and larger.

    He said the passive hedge didn't make sense because the fund was hedging some currencies that were part of the total fund benchmark even though the fund had no actual exposure to them. In another example, CalPERS was hedging against the yen because it was part of the system's private equity benchmark, even though the private equity portfolio had no exposure to the yen.

    Another reason the passive hedge is being eliminated is that CalPERS needs to maintain cash reserves for settlements of hedges, known as forwards, at a time when the pension fund faces cash shortfalls.

    Even if CalPERS achieves it 7.5% assumed rate of return every year, the pension fund is projected to need $2 billion more to pay benefits beginning July 1, 2015, than its cash on hand is expected be. That shortfall is expected to grow to $17.9 billion by the 2039-2040 fiscal year, the retirement system's statistics show.

    “Our ability to absorb cash flow volatility is rapidly diminishing,” a review of the currency program by CalPERS investment staff states. That review was presented to board members last September. Charts prepared for the investment board show the forward settlements ebb and flow, with money coming in and out, but the potential for a large payout in a particular month to settle forward contracts can occur.

    The most CalPERS paid to settle forwards was $483 million in November 2009. Mr. Baggesen said the settlements even out over time, but CalPERs still needs to keep cash on hand for the potential of a settlement.

    Not without controversy

    The plan to end the passive hedge is not without controversy. CalPERS' general consultant Wilshire Associates recommended against it until an active hedging program can be put in place.

    “The currency hedge has reduced risk slightly for CalPERS without decreasing returns,“ said Wilshire consultant Michael Schlachter in a Feb. 7 letter to the CalPERS board.

    He said CalPERS is also managing its cash flow better even with a projected cash shortfall.

    “Given the proven reduction in risk to CalPERS with no impact on return and a decreasing cash flow management program going forward, we believe that this program should be given more consideration for continuation,” he wrote.

    Mr. Schlachter and Wilshire have been longtime advocates of an active hedging program for CalPERS. In 2008, when the CalPERS board implemented the 15% passive benchmark, Mr. Schlachter called for an active program that would be more dynamic in nature than CalPERS' staff's recommendation.

    Mr. Baggesen supports active currency management, but said an implementation plan still needs to be decided by staff and then presented to the board for discussion over the next few months.

    Mr. Baggesen said active currency management will force CalPERS' investment staff to take a position on whether it thinks the dollar will strengthen or weaken against foreign currencies.

    “Then we will live or die with how well we do with our forecast,” he said. n

    Related Articles
    Currency managers welcoming volatility
    AUSCOAL shifts to active currency hedging from passive
    More funds eyeing active currency hedging
    CalPERS will take two years to reach new asset allocation targets
    CalPERS spends $1.3 billion for managing investments in fiscal year 2013
    National Grid U.K. plan gradually moving to match future liabilities
    CalPERS to pare back private equity target allocation
    CalPERS chopping hedge fund allocation
    CalPERS' staff seeks larger private equity relationships
    Schlachter leaving Wilshire
    Recommended for You
    A globe on a desk next to a laptop.
    Institutions eke out positive returns during volatile Q1 — Wilshire TUCS
    Northern_Trust_Universe_1550_i.jpg
    Northern Trust universe posts 0.7% median return for Q1
    Anca Drexler
    Building Ontario Fund chooses CIO from OMERS
    Sponsored
    White Papers
    The State of Lifetime Income Report
    The Next Wave of LDI Evolution
    Retirement security to future income wins, TIAA brings you the latest financial…
    U.S. Public Funds Top Performers: Q2 2024
    Generative AI Investing: Opportunities at a Key Tech Inflection Point
    Research for Institutional Money Management: Advancing Physical Risk Modelling,…
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    October 23, 2023 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2025. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • CIOs
      • Consultants
      • Defined Contribution
      • ESG
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Private Credit
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • Special Reports
      • Washington
      • White Papers
    • International
      • U.K.
      • Canada
      • Europe
      • Asia
      • Australia - New Zealand
      • Middle East
      • Latin America
      • Africa
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2024
      • Eddy Awards
    • Resource Guides
      • Active Thematic Global Equities
      • Retirement Income
      • Fixed Income
      • Pension Risk Transfer
      • Pooled Employer Plans (PEPs)
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
    • Print