Plans such as the $305.7 billion California Public Employees' Retirement System have moved away from hedge funds in favor of strategies designed to achieve equity returns, such as private equity and real estate.
“Publics need return. Because public plans have the benefit of time and aren't marking to market their liabilities the way corporate plans are, I've seen an increase in interest in leverage among publics,” Mr. Austin added.
CalPERS spokeswoman Rosanna Westmoreland said in an e-mail that the Sacramento-based fund uses leverage “for a variety of purposes, including … leverage embedded within limited partnership structures for the purchase of real assets, notional leverage achieving market exposure using equity and fixed-income futures and swaps and can use leverage to generate liquidity.”
She added: “We are planning to consider the question of using additional leverage during our upcoming asset-liability management planning process.”
At the Ohio Police & Fire Pension Fund, the focus was on reducing risk at the overall portfolio level, said spokesman David Graham. The investment board of the $13.7 billion plan originally selected a 1.2 times leveraged policy portfolio, which didn't increase expected return relative to the prior policy portfolio of no leverage, but did reduce expected risk.
“The approach created a more risk-balanced portfolio by reducing the portfolio's risk contribution from equities and increasing the risk contribution from fixed income through levered fixed-income mandates, which reduces overall expected risk without sacrificing return,” Mr. Graham said.
The Columbus-based fund has been reducing equity risk and has two-times leveraged global inflation-protected bond mandate of $1.2 billion in place. However, it has not yet implemented other leveraged bond exposures.
The Florida State Board of Administration, like CalPERS, also uses leverage, said John Kuczwanski, spokesman for the $179.5 billion Tallahassee plan.
Some of the FSBA's hedge fund strategies and real estate funds use leverage, he said. The FSBA will also sometimes use leverage when buying or financing real estate internally.
“Leverage can be used to offset or hedge other types of risk in the portfolio,” Mr. Kuczwanski said. “Additionally, it may make sense to (use) leverage when financing rates for real estate are low.”
That said, the FSBA is wary of upping the usage of leverage because of the potential damage it can do to the portfolio. “We have no plans, nor are we open to the idea of using additional leverage,” said Mr. Kuczwanski. “Utilizing leverage can introduce additional investment risk, volatility, counterparty risk and complexity to the portfolio.”
The FSBA oversees $180.5 billion, including the $144.1 billion Florida Retirement System defined benefit plan.
Although T. Rowe Price's Mr. Austin said that leverage is far less common among corporate DB plans than public plans — because corporate plans are relative-return investors where the return they're investing against is that of their liabilities — others have noticed growth.
“We see corporate pension plans using leverage a number of different ways, but they're all trying to achieve the same objective: risk reduction,” said Gary Veerman, managing director at BlackRock Inc. and a member of its U.S. client solutions group within BlackRock Solutions, New York.
Mr. Veerman said he's had a number of conversations recently with corporate clients about using swaps and Treasury futures in situations in which a significant return is needed from limited available capital.
“Leverage can be a powerful tool for risk reduction,” Mr. Veerman added.
In discussing the use of leverage among corporate pension plans, Jay Love, Atlanta-based partner and senior consultant at Mercer Investment Consulting, said the shift to liability-driven investing typically has some component of leverage.
“In corporate plans, there's generally been an increase,” Mr. Love said. “It's not used in an aggressive way. It's used to hedge the liability side.”