CalSTRS, like many of its public pension fund counterparts throughout the U.S., saw massive losses in 2008 and 2009. CalSTRS itself saw its assets decline by around a quarter in the fiscal year ended June 30, 2009.
The retirement system's funding level is 68.5%. CalSTRS was scheduled to run out of money to pay retirees by the mid-2040s before the state Legislature and the governor agreed to a package in 2014 that increased contributions from school districts, the state and teachers.
But that plan to reach full funding is dependent on CalSTRS meeting its annual expected rate of return of 7.5%, a goal that pension fund officials say can still be met but with less volatility under the RMS approach.
Critics have said a 5% expected rate of return is more realistic long term.
The pension fund earned a 4.8% return for the fiscal year ended June 30, but had an annualized 7.8% for the 20-year period ended June 30.
CalSTRS said in a November report that it back-tested its RMS strategy looking at the 20 worst months for the S&P 500 in the past 21 years. It said the average S&P return during those months was -8.6% while the RMS portfolio generated an average positive return of 2.98%
Under the RMS plan, the retirement system will reduce equities to 47% from 51% of the total portfolio and fixed income, to 15% from 17%. The $16 billion risk mitigating strategies portfolio would consist of 35% long-duration U.S. Treasuries, 40% trend-following strategies, 15% global macro hedge funds and 10% systematic risk-premium strategies.
Mr. Ailman said CalSTRS will be placing its money in separate or managed accounts as part of a plan to get substantial fee reductions.
CalSTRS certainly isn't the only pension system looking to reduce the impact of another downturn using various volatility management strategies.
A report by Lyxor Asset Management, CalSTRS' hedge fund consultant, found that around the world, large public pension funds were very active in global macro and trend-following investments in 2015.
The report found that last year:
nin Sweden, the $35.8 billion AP3, Stockholm, allocated $1 billion to global macro strategies for the first time;
nKorea Post Savings, Seoul, with $60 billion in assets, has been looking for global macro and market-neutral strategies and issued two RFPs, with a target allocation of $1 billion;
nthe $42.3 billion Teachers' Retirement System of the State of Illinois, Springfield, invested $588 million in global macro and managed futures strategies;
nthe $8.7 billion School Employees Retirement System of Ohio, Columbus, hired William Blair & Co. to run a $50 million global macro strategy and the $9 billion Municipal Employees' Retirement System of Michigan, Lansing, invested $300 million to run a similar allocation; and
nthe $27.7 billion Iowa Public Employees' Retirement System, Des Moines, issued an RFP in August to select a managed account platform provider to build an allocation to trend-following and global macro funds.