17/02/2010 Author: Kapila Gohel

CalSTRS pension plans first hedge fund move 

The $134.1bn California State Teachers’ Retirement System (CalSTRS), the US’s second largest public pension fund, is putting the final pieces in place to make its first ever hedge fund investment.

Unlike its close peer, the California Public Employees Retirement System (CalPERS), CalSTRS has held off making any investments in hedge funds in the past, but is now seeking a specialist investment consultant to help the fund with its first hedge fund manager search, a CalSTRS spokesperson exclusively told HFMWeek.

“Hedge funds are being looked at as a diversifier to the portfolio,” he said, and while no allocation has been decided upon as yet, the spokesperson revealed CalSTRS will be taking a direct approach and may invest in up to five managers, “Ultimately CalSTRS will be looking for single managers, ranging from three to five,” he said.

The search for a consultant is currently underway and CalSTRS expects to decide on a firm by mid-summer or early fall this year. Following that, the consultant will help the pension, the largest teachers’ retirement fund in the US, to search for managers.

At the moment, CalSTRS acknowledges ‘absolute returns’ as an asset class within its investment portfolio however it does not have any actual or target allocations and funds have yet to be invested in managers within this space.
In fact, during the February investment committee meeting staff discussed the possibility of including commodities in the absolute return class once it ‘graduates’ from the innovation portfolio.

CalSTRS implemented a new innovation portfolio, of around $2bn, in March last year to invest in opportunities outside of the traditional asset classes. However, that did not include hedge funds.

The spokesperson explained why the pension has been slow to move into the space: “CalSTRS has historically been rather conservative with the investments that have, until recently, generated 75 cents of every benefit dollar paid to our members. While it may not seem that way to more aggressive investors, CalSTRS likes to see how a strategy performs historically before considering whether to adopt it.”

To date, the pension has steered clear of most absolute return-type vehicles such as global tactical asset allocations and 130/30 funds, however it has some exposure to Treasury Inflation-Protected Securities (Tips).

In December 2009, CalSTRS became the first US-based fund to back the ‘standard for good corporate governance’ policy created by the British-based Institutional Shareholders’ Committee. The policy identifies best practices for institutional investors in areas of transparency and disclosure of activities.