HARRISBURG, Pa. (HedgeWorld.com)–Portable alpha strategies have paid off for the Pennsylvania State Employees’ Retirement System, adding $780 million in net earnings from its January 2002 inception date. So it should come as no surprise that the program will essentially grow by roughly $2.2 billion.
Trustees approved this week the expansion of its $6.7 billion portable alpha strategy in hiring two funds of hedge funds with an international focus along with a domestic fund of funds, followed by add-on investments among three existing fund of funds firms. Also, under the domestic equity mandate, the pension fund invested with an additional global macro hedge fund manager.
Portable alpha has gained interest in recent years for its promise of empowering large institutional investors to separate the sources of alpha and beta returns. Public equity exposure through indexing provides market returns (beta), and then alpha is strategically added through hedge funds. PennSERS was one of the early players in this realm, adopting a program in January 2002. Since that time, the portfolio has earned 4.5% more than if the fund had invested only in the S&P 500, officials said in a statement.
“That success led the Investment Office to recommend, and the Board to approve, greater exposure to portable alpha,” said Nicholas J. Maiale, chairman of the $30 billion public pension fund’s board, in a statement.
This time alpha will pack its bags and move into the pension fund’s international equity portfolio. Arden Asset Management LLC and The Rock Creek Group each will manage $650 million in low-volatility non-directional funds that will be in addition to exposure to international stock markets, done through EAFE index swaps.
On the U.S. equity side, an additional $650 million will be split between a new fund of funds and three existing firms. Robeco Sage Capital will manage $25 million. The remaining $625 million will be equally divided between Mesirow Financial, Morgan Stanley Alternative Investment Partners and PAAMCO.
Trustees also interviewed a fourth fund of funds–Guggenheim Capital LLC.
In the global macro area, single fund manager First Quadrant LP will handle $200 million in a separate global macro portable alpha program that’s also within the domestic equity asset class. The U.S. equity program maintains a large-cap equity market exposure through S&P 500 contracts.
First Quadrant was one of three global macro finalists interviewed by trustees last October. The board chose AQR Capital Management and Bridgewater Associates Inc. to split a $750 million mandate at the end of October.
A spokesman for PennSERS said that it will likely take a month or more to get all the contracts finalized. Pension fund staff also work closely with the investment consultant Rocaton Investment Advisers, Norwalk, Conn., in structuring the portable alpha program.