In April 2004, Canada’s national public pension plan awared the first of 4 “notional mandates” of $500 million each. The four overlay managers were tasked with providing the CPP with the holdings of a hypothetical market neutral equity fund. The CPP Investment Board then sold the hypothetical “shorts” out of their passive equity portfolio and used the proceeds to overweight the hypothetical “longs”. The managers were then compensated based on the performace of the hypothetical portfolio, or the “active overlay”.
In a press release dated April 4, 2004, the CPP described the program in the following terms:
“Under the program, each firm will manage the equivalent of a $500 million equity portfolio within the total CPP portfolio of $66.3 billion. Unlike traditional programs where external investment firms are given cash to invest, each manager in the Active Overlay Program will have the right to identify securities in the CPP Investment Board’s public equity portfolio that it believes are overvalued. These securities will be sold and the proceeds used to purchase other securities the manager believes have greater investment potential. The managers are not permitted to sell stocks short. Structuring the mandate in this fashion is an innovative way to mitigate transaction costs while pursuing superior risk adjusted returns. It also provides a clear and powerful tool for quantifying the performance of each investment manager.”