The Allocator - Mar 22 - South Carolina | With Intelligence

South Carolina ups portable alpha target by almost $850m

The $41bn investor is readying the low-beta sleeve ahead of short-term volatility

Adam Rees
16 MAR 2022

The $41.6bn South Carolina Retirement System Investment Commission has increased its allowable exposure to portable alpha strategies, comprised of low beta hedge funds, in anticipation of short-term market volatility.

Portable alpha doesn’t have a specific target allocation, but rather an agreed range in which capital can be deployed as needed.

As of the end of 2021, exposure sat at 10.9%, or $4.5bn, of the broader portfolio, with a cap of 12%. The range is between 0%–12%.

CEO Michael Hitchcock recommended upping the cap to 15% at the commission’s March 3 meeting, giving the system an additional $832m to play with.

“The portfolio is designed to be a low beta portfolio and it’s designed to do well for us, or attempt to do well for us, regardless of what’s happening in the overall markets,” Hitchcock said, noting the strategy’s lack of meaningful market correlation.

South Carolina has utilized the strategy for more than half a decade now and has earned $1bn in excess returns — a performance owed to a mix of manager selection and the structure of the portfolio.

And so long as the strategies invested in outperform the cash rate, the investor generates an uncorrelated source of additional return.

“What we don’t want to do is redeem from the portfolio in the event of a significant market sell-off,” Hitchcock added.

Most of the $4.5bn portfolio is currently managed by Lighthouse Partners through managed accounts.

The investor also has tickets with Wellington ($300m) and Man Group ($200m), agreed in 2017.

At the same meeting, CIO Geoffrey Berg noted the portfolio was “doing exactly what we hope it will.”

The cap range increase notwithstanding, Berg noted in January that if rates started to rise — and they are expected to more than once this year — a portfolio revisit may be required.

When this revisit might happen remains to be seen — and at this stage, no further changes are anticipated.

A popular choice

The commission is not the only investor to recognize the desirability of portable alpha.

Earlier this month, the New Mexico Public Employees Retirement Association hinted it would revisit the space after a pause brought about by high-level departures, and Kern County, another US-based investor with exposure to the asset class, has also been mulling increased exposure. The $5.6bn pension is eyeing two new hedge fund managers as part of an allocation review.