South Carolina Retirement System Investment Commission, Columbia, approved investments totaling about $1.2 billion with two alternative beta managers.
Wellington Management and Man Group each will ultimately manage 2% allocations — about $600 million each in current dollars — from the $29.6 billion South Carolina Retirement Systems, Columbia, which is managed by the investment commission.
At a meeting Thursday, investment commissioners approved initial investments of $300 million to Wellington and $200 million to Man Group in risk-factor-based investment strategies, which capture hedge fund beta returns.
The investments are the RSIC's first to alternative beta strategies, made partly because “we don't want to pay hedge fund fees for market beta,” CIO Geoffrey Berg told commissioners, according to a webcast of the meeting.
Mr. Berg urged commissioners to “think hedge fund returns without hedge fund fees,” noting the rules-based, systematic strategies “structurally speaking are hedge funds and will be a complement to our existing portable alpha portfolio.”
Wellington's all-in fee for its strategy, which invests in more than 30 hedge fund substrategy betas via its multiasset managed risk platform will not exceed 110 basis points. Man Group's alternative beta strategy fee is capped at 95 basis points, showed meeting materials presented by Weiyi Ning, an RSIC investment director.
The Wellington and Man Group funds will be added to the $2.4 billion portable alpha portfolio, which now is invested in hedge funds. As of Feb. 28, Lighthouse Partners managed approximately $1.4 billion in a customized hedge fund-of-funds portfolio, $562 million was managed by Bridgewater Associates and $444 million was managed by D.E. Shaw Group.
Ms. Ning stressed to commissioners that the alternative beta investments will be “very diversifying” to the portable alpha portfolio with an expected net annual return of 8%.
During their meeting, commissioners also approved asset allocation changes, including a winding down of the fund's stand-alone hedge fund portfolio.
The dedicated hedge fund allocation is no longer needed because the system's hedge funds are included in the portable alpha allocation, Mr. Berg said on the webcast.
The 4% hedge fund target will be gradually reduced by 2 percentage points each in fiscal year 2017 and 2018. The first half taken from hedge funds will be allocated to global asset allocation in the fiscal year ending June 30, 2017, raising the asset class target weighting to 10%. The second half will be directed to equities in the 2018 fiscal year, increasing that target to 47%, meeting materials showed. Global equity will increase 1.8 percentage points to 33%, private equity up 0.2 percentage points to 9% and equity options will remain at 5%.
Other changes to the fund's asset allocation effective July 1, 2017, are:
- unchanged the targets for conservative fixed income – overall, 12%; core fixed-income, 10%; and cash, 2%;
- the diversified credit target will stay at 18%, with the mixed credit target being reduced to by 1 percentage point to 6%, private debt rising 1 percentage point to 7% and emerging markets debt staying at 5%;
- real assets' target weight will increase by 2 percentage points to 10%; real estate investment trusts will increase by 1.2 percentage points to 2%; private real estate will drop by 0.2 percentage points to a 6% target, and infrastructure's target is rising 1 percentage point to 2%.