Pennsylvania pension to add tail risk mitigation portfolio

The investment committee of the Pennsylvania Public School Employees’ Retirement System (PSERS) adopted a tail risk mitigation strategy policy, which was originally presented to board members over the summer. The $61 billion pension fund’s investment office has been charged with establishing a strategy with a mandate of providing protection against significant equity market drawdowns. PSERS does have some experience with tail risk mitigation strategies. Staffers said in a memo that they have used an external manager within the absolute return allocation since 2011 and the LIBOR Plus allocation since 2015. A $250 million allocation in fact was made to the Capula Tail Risk Fund Ltd., Class C shares in April 2011. Also, the system ran internally a pilot S&P 500 tail risk hedging program from February 2017 to March 2019. Dusting off the portfolio playbook, the internal investment team has been tasked with managing the strategy has significant experience prior to PSERS managing the instruments utilized in such a program, officials said. It is expected that the fully mature program will feature both an internally managed portion and an externally managed portion in order to provide a comprehensive and diversified program. It is expected that the program can generally hedge half of the public market equity beta contributed by public markets. Officials plan to manage the strategy in an active manner in order to monetize any gains as a result of these drawdowns and redeploying those proceeds into other asset classes while maintaining some level of protection, according to a memo sent to the board. Aon is the PSERS’ general investment consultant.

Pennsylvania pension to add tail risk mitigation portfolio

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