Officials at the $129 billion Teacher Retirement System of Texas, Austin, are gearing up to manage about $3.4 billion in a risk-parity approach in-house, making it one of the few pension funds to design and manage its own portfolio to even out risk across asset classes.
Texas Teachers follows the State of Wisconsin Investment Board, Madison, and the Healthcare of Ontario Pension Plan, Toronto, in managing risk-parity strategies internally.
Texas fund officials have been conducting something of a risk-parity experiment over the past two years: Bridgewater Associates LP and AQR Capital Management LLC were hired in October 2012 to manage an aggregate $584 million — just 0.5% of total plan assets in current dollars.
In July, Texas Teachers' investment management division began managing an even tinier portion of plan assets — 0.1% or $119 million — internally.
Returns of both the internally and externally managed risk-parity portfolios have been good, with the internal portfolio producing 11.8% for the year ended Sept. 30, 180 basis points over the 10% combined return of Bridgewater's and AQR's portfolios, according to a risk report presented to TRS trustees on Nov. 20 by Jase Auby, chief risk officer and senior managing director.
Texas Teachers' investment officers declined to talk about their experiment, but it was successful enough to persuade investment officers and trustees to change the pension fund's asset allocation to create a dedicated 5% allocation to risk-parity strategies.
Texas Teachers' staff will manage 50% of the $6.8 billion risk-parity portfolio internally with the balance split between AQR and Bridgewater.
The exact allocation to each manager has not been determined yet, said Howard J. Goldman, a TRS spokesman, in an e-mailed response to multiple requests for interviews and more information about the risk-parity strategy and other asset allocation and benchmarking changes.
As of Sept. 30, AQR managed $295 million in a risk-parity strategy and Bridgewater, $289 million, Mr. Goldman's e-mail stated.
Neither David G. Kabiller, founding principal at AQR, nor Parag Shah, a Bridgewater senior management associate, returned calls seeking more information about their firms' expanded risk-parity responsibilities for Texas TRS.