Recent Novim News

San Diego Pension Dials Up the Risk to Combat a Shortfall

A large California pension manager is using complex derivatives to supercharge its bets as it looks to cover a funding shortfall and diversify its holdings.

The new strategy employed by the San Diego County Employees Retirement Association is complicated and potentially risky, but officials close to the system say it is designed to balance out the fund's holdings and protect it against big losses in the event of a stock-market meltdown.

San Diego's approach is one of the most extreme examples yet of a public pension using leverage—including instruments such as derivatives—to boost performance.

The strategy involves buying futures contracts tied to the performance of stocks, bonds and commodities. That approach allows the fund to experience higher gains—and potentially bigger losses—than it would by owning the assets themselves. The strategy would also reduce the pension's overall exposure to equities and hedge funds.

The pension fund manages about $10 billion on behalf of more than 39,000 active or former public employees.

San Diego County's embrace of leverage comes as many pensions across the U.S. wrestle with how much risk to take as they look to fulfill mounting obligations to retirees. Many remain leery of leverage, which helped magnify losses for pensions and many other investors in the financial crisis. But others see it as an effective way to boost returns and better balance their holdings.

"We think we'll see a lot more people look at risk the way we do in the not-too-distant future," said Lee Partridge, chief investment officer of Houston-based Salient Partners LP, the firm hired to manage the county's money. "Yes, we are an outlier, but that is not a bad thing."Mr. Partridge said one of the main goals is to avoid an overreliance on the stock market for returns.


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