US - New options about the role of risk managed absolute return strategies (RMARS) have been submitted to the California Public Employees' Retirement System (CalPERS).
The RMARS portfolio has been funded with allocations from global equity since its inception in 2002 and the size of the programme has increased to US$5.8bn, representing 2.35% of fund assets.
But in documents released ahead of the investment committee meeting, due to take place today, CalPERS new options for the vehicle have put forward for consideration.
A discussion document from CalPERS explained that that having RMARS as a sub-asset class within equities with very different risk / return characteristics, and then treating it as a separate policy allocation for the purpose of return attribution appeared to be inconsistent with a strong asset allocation discipline.
Instead, it said a plausible solution was to ‘equitise’ the RMARS exposure by applying a derivative strategy to transport the alpha from the absolute return strategies (ARS) to the global equity return.
This would result in en effective return of equity benchmark plus the RMARS return net of cash less derivative fees, said CalPERS. Additionally RMARS could be treated as a separate asset class with its own policy allocation.
As a result, staff at CalPERS have proposed to research the issue and present alternatives to the committee in 2008.
In a separate development, it has been proposed that the CalPERS’ investment committee approve an active risk target for the total fund along with the strategic asset allocation.
This has arose because it is felt that staff would then develop a risk budget and an implementation strategy to optimally allocate the active risk to various asset classes in accordance with the expected alpha.
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