What do they know that we don’t?
In an indication of just how far so-called alternative investments have come, The Wall Street Journal reports that the nation’s second-largest pension fund “is considering a significant shift away from some stocks and bonds amid turbulent markets world-wide, one of the most aggressive moves yet by a major retirement system to protect itself against another downturn.”
The paper claims top investment officers of the California State Teachers’ Retirement System have discussed moving as much as $20 billion, or 12% of the fund’s portfolio, into hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund.
“The new tactic—called ‘Risk-Mitigating Strategies’ in Calstrs documents posted on its website—was under discussion for several months as the fund prepared for a scheduled three-year review of how it invests assets for nearly 880,000 active and retired school employees,” according to the Journal. “But the recent volatility around the world has provided a fresh reminder of how exposed Calstrs’ investments are when markets swoon.”
As the Journal notes, pension funds across the U.S. are wrestling with how much risk to take as they look to fulfill mounting obligations to retirees, and the fortunes of most are still heavily linked with the ebbs and flows of the global markets despite efforts to diversify their investments. State pension plans have nearly three-quarters, or 72%, of their holdings in stocks and bonds, according to Wilshire Consulting.
Calstrs Chief Investment Officer Christopher Ailman told the paper, “I’ll equate this to the cost of insurance. It’s the idea of adding more of a hedging asset class into the portfolio.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
