Pennsylvania is not only the latest battleground between the Democratic presidential contenders, it’s also one the biggest battleground between traditional long-only investing and alternative investments.
The AP reports that the Pennsylvania State Employees Retirement System has been getting a lot of fan mail after it announced a 17% return last year. Reports AP:
“The secret? Diversifying away from the staid, plain-vanilla investments historically made by public funds, such as buying and holding big chunks of U.S. stocks and bonds. Concentrating money in domestic holdings makes the pension greatly susceptible to the swings of the U.S. market. Instead, performance was powered by alternative investments such as venture capital and funds of hedge funds, using complex strategies such as portable alpha and absolute returnâ€”a path long blazed by endowments.”
John Winchester, the plan’s CIO, tells AP that his goal is to “whether a variety of different market environments”. It appears he may stick with the nearly 25% allocation to hedge funds and private equity for some time. As the AP points out:
“Looking ahead, Winchester sees a volatile stock market throughout the year because he doesn’t believe blowups from the housing crisis are over.
“‘There’s a way to go before things settle down,’ he said.”
The SERS website breaks down the numbers:
As you can see, the total allocation to alternative investments (hedge funds, private equity/VC, real estate, and commodities (aka “inflation protection”)) was around 40% by the end of Q3, ’07. So the traditional “60/40” stocks/bonds is actually “40/13” in the Keystone State, with the remainder going to alternative investments.
Approximately a quarter of that 40% was allocated to hedge funds (aka “absolute return”) – in the form of two funds of hedge funds (disclosure: one is a sponsor of this website).