Key Takeaways
- • San Diego County Employees' Retirement System (SDCERS) is pursuing a managed futures allocation of 2% to 4% of its $8.3 billion portfolio to enhance diversification, following a comprehensive review with consultant Aon.
- • SDCERS rejected alternative risk premia strategies in favor of managed futures, citing limited track records, unproven performance in major market downturns, and excessive manager dispersion in the alternative risk premia space.
- • Aon's analysis highlights managed futures' low correlation to global equities and historical outperformance during market stress periods, including the 2008 financial crisis, 9/11 attacks, and Black Monday.
- • Managed futures strategies are projected to generate returns of 6% to 12% through momentum-based trading implemented primarily via futures and forward contracts.
Summary
San Diego County Employees' Retirement System (SDCERS) has concluded its strategic review of alternative investment strategies and determined to pursue a managed futures allocation to diversify its $8.3 billion portfolio. The decision, made in consultation with Aon, represents a deliberate choice between two alternative approaches the pension evaluated over several meetings: managed futures and alternative risk premia strategies.
The retirement system selected managed futures specifically because of their structural advantages for portfolio diversification. According to Aon's analysis, managed futures exhibit low long-term correlation and beta to global equities, positioning them as an effective hedge during periods of market stress. The consultant cited historical performance data showing managed futures' strong performance during the 2008 financial crash, the World Trade Center attacks of 2001, and Black Monday, demonstrating their value as a downside protection mechanism relative to traditional asset classes.
SDCERS explicitly rejected alternative risk premia strategies due to three material concerns: limited performance history during major market downturns, unnecessary portfolio complexity, and elevated manager risk. Aon noted that alternative risk premia managers interviewed displayed significant performance dispersions, raising questions about consistency and reliability. By contrast, managed futures offered a more transparent, liquid alternative with longer performance histories across multiple market cycles.
The pension is now analyzing the optimal allocation level, studying the potential impact of a 2% to 4% allocation to managed futures on overall fund performance and risk characteristics. Aon projects managed futures strategies will generate returns between 6% and 12% through momentum-exploiting strategies implemented predominantly via futures and forward contracts, positioning the allocation as both a diversifier and a return-generating component of SDCERS' portfolio.
The retirement system selected managed futures specifically because of their structural advantages for portfolio diversification. According to Aon's analysis, managed futures exhibit low long-term correlation and beta to global equities, positioning them as an effective hedge during periods of market stress. The consultant cited historical performance data showing managed futures' strong performance during the 2008 financial crash, the World Trade Center attacks of 2001, and Black Monday, demonstrating their value as a downside protection mechanism relative to traditional asset classes.
SDCERS explicitly rejected alternative risk premia strategies due to three material concerns: limited performance history during major market downturns, unnecessary portfolio complexity, and elevated manager risk. Aon noted that alternative risk premia managers interviewed displayed significant performance dispersions, raising questions about consistency and reliability. By contrast, managed futures offered a more transparent, liquid alternative with longer performance histories across multiple market cycles.
The pension is now analyzing the optimal allocation level, studying the potential impact of a 2% to 4% allocation to managed futures on overall fund performance and risk characteristics. Aon projects managed futures strategies will generate returns between 6% and 12% through momentum-exploiting strategies implemented predominantly via futures and forward contracts, positioning the allocation as both a diversifier and a return-generating component of SDCERS' portfolio.
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