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Portfolio > Asset Managers

CalPERS Mulls the Short Side

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SACRAMENTO, Calif. (–Perhaps the latest investment policy proposal on the table at the California Public Employees’ Retirement System will stand as Chief Investment Officer Mark Anson’s parting legacy.

Mr. Anson and his staff hope to include long/short equity managers in the US$196 billion pension fund’s enhanced indexing program. If the idea is approved, this would be the first time managers can take short positions on particular stocks. For Mr. Anson, this move would mean his advocacy of integrating traditional and absolute-return style investing would finally be put in place, even if it does occur after he leaves the pension fund at the end of the year for Hermes Pensions Management Ltd.

According to a memo to the CalPERS’ investment committee, the fund’s staff intends to recommend that trustees approve a search for managers employing long/short enhanced indexing strategies.

CalPERS’ externally managed public equity assets total US$120 billion. It’s not known how much the pension fund would be willing to dedicate to long/short portfolios on top of its existing hedge fund program, which incorporates single-strategy vehicles and funds of hedge funds. A total of US$2 billion has been set aside for that investment program already.

A new request for proposal would center on managers who can go up to 135% long and 35% short in the portfolio, while maintaining a market-like risk-adjusted return. The staff would consider managers with an estimated tracking error of 6% or less and would rely on the risk monitoring already in use in the pension fund’s absolute-return strategies portfolio.

“While there are not a large number of firms employing this strategy, there are a sufficient number of firms to establish a pool, and many of these firms are well known to CalPERS or currently managing assets in a long-only portfolio for CalPERS,” staff members reassured trustees in their proposal, to be considered at the investment committee’s Nov. 14 meeting.

The change in manager search parameters comes after a number of RFPs that began in 2003. At the board meeting this past September, four managers were added to a spring-fed pool of managers, which were in addition to three enhanced indexing mangers and a group of five active managers chosen in April.

CalPERS’ investment consultant, Wilshire Associates, doesn’t approve of the measure and objects to the greater risk and increased due diligence that it says would be involved in its implementation.

Mr. Anson’s staff says, however, that the idea of letting some managers go short will allow them to fully wield their investment ideas. The expected alpha for the enhanced indexing portfolio would be 8% annually with the inclusion of shorting techniques, while a long-only portfolio would yield only 2.5%, staff analysts concluded in their research.

If managers are allowed to short, CalPERS also expects to hire a prime broker to assist in trade management, performance calculation and the monitoring of risk targets of each manager and the overall program.

Contact Bob Keane with questions or comments at [email protected].


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