SACRAMENTO, Calif. (HedgeWorld.com)–Commodity futures have made it to the California Public Employees’ Retirement System agenda, but whether they will remain and become a part of a pilot program is yet to be seen.
The size of such a program has yet to be determined, but in its analysis, CalPERS’s staff assumed an allocation of 3% of fund assets, or roughly US$6 billion. That amount would dwarf the US$200 billion pension fund’s current allocation to hedge funds and its proposed shorting-selling portfolios combined.
“A size of US$6 billion would indeed be considered quite massive for actively managed natural resources programs,” said Hilary Till, principal of Premia Capital, a Chicago-based commodity derivatives firm. She added, though, that at this point the CalPERS documents only refer to passive index investments. Specifically, the program would be focused on beta diversification rather than alpha-seeking instruments such as hedge funds.
The allocation to commodities is being proposed as a way to complement the pension fund’s current portfolio. Providing a forecasted return of 6.5% annually, commodity futures would do little to boost the fund’s overall return, but would aid in diversification, particularly in the area of equity where the majority of the CalPERS portfolio is invested.
A US$6 billion allocation used in the staff’s risk analysis would be a substantial portfolio in the commodity markets, where the larger investment funds traditionally may hover between US$1 billion and US$2 billion.