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New Mexico PERA Begins Portable Alpha Makeover

The retirement association decided last year to stop using AQR’s portable alpha fund.

New Mexico’s Public Employees’ Retirement Association is redoing its portable alpha program — again.  

The $16 billion retirement fund decided in October to end its old portable alpha program, which was run by AQR. Now, PERA is looking to implement a plan similar to the one it ran through the 2008 financial crisis, but with an eye toward avoiding past mistakes.

Portable alpha strategies use derivatives to take alpha — the extra return achieved by a skillful active manager — and transport it into a beta-only strategy, such as a bond index. These strategies can be risky: Some blew up during the last financial crisis. And more recently, it was said that the Alberta Investment Management Corp.’s portable alpha overlays may have contributed to its volatility trading losses.  

The PERA board discussed the plan to revamp the retirement system’s portable alpha program at its Tuesday investment committee meeting, which was held over livestream. During the meeting,  chief investment officer Dominic Garcia discussed PERA’s previous experiences with portable alpha and steps for rebuilding the program.

New Mexico PERA has had a portable alpha program in some form or another since 2007, according to Garcia. The initial iteration of the program, which included 15 hedge fund managers, met its objective of beating the S&P 500 index by at least 3 percent over the three- and five-year periods ending in March 2015. Judged from its 2007 inception, however, the program underperformed the S&P 500 — leading PERA to change its portable alpha strategy.

Speaking Tuesday, Garcia said that PERA had recently investigated the cause of this past underperformance. The findings? PERA removed the program’s beta overlay for four months, between March and June 2009, because of margin calls. 

“The program wasn’t in the market for four months, and those were some of the most profitable four months in history,” Garcia said.  

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When that program ended in 2015, PERA replaced it with AQR’s style premia fund. This fund, however, went on to underperform its benchmark, the Russell 3000, for the period its inception in August 2015 to October 2019. According to Garcia, this was because the strategy relied on just one set of alpha streams, unlike the diversified alpha pool found in PERA’s original program.

Due to this underperformance, PERA decided to nix the AQR fund in October 2019 in favor of revamping its portable alpha program once again. The retirement system started in December by moving its existing hedge fund allocations from its policy portfolio to its risk mitigation portfolio, where they are classified as pure active risk strategies, according to Tuesday’s meeting documents.

This “3.0” version of portable alpha started with about $431 million and includes four strategies: distressed credit, style factor premia, multi-strategy market neutral, and securitized/structured credit relative value. These programs will be overlaid with the U.S. Aggregate bond index, according to the plan presentation.  

The goal moving forward is to house between 12 and 15 alpha strategies in the portfolio. The plan presentation shows that “stage two,” which will take place by June, will involve adding a technology equity market neutral fund, an emerging market macro fund, and a trend-following long/short fund to the portfolio.  

Most important, though, will be staying committed to the program, according to Garcia.  

“Once you set a course of the program, it’s important to stay the course,” Garcia said. “Even through the rough times, the program has come through and produced above expectations over time.” 

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