On November 25, the Pennsylvania State Employees Retirement System (SERS) announced its Q3 results.  Public pensions across the US issued similar press releases detailing the Q3 carnage.  But what makes this pension plan different is its widely publicized use of portable alpha (see our April 2008 post.)  As a result, the media has been quick to associate the fund’s losses with the “aggressive“, “exotic” and “unusual” investment strategy.  To be sure, it appears that portable alpha cost the plan in Q3.  But is that an indictment of the portable alpha architecture per se?  We’re not so sure.

The Wall Street Journal reports that:

“The blowup is yet another example of the wide-ranging damage caused by sophisticated investment strategies peddled to pension funds and other institutional investors when the stock market was soaring.”

Pennsylvania SERS reportedly lost $1.5 billion on swaps used to gain market exposure.  These swaps allowed the plan to get the exposure it wanted without having to allocate as much capital (i.e. it only had to post margin on the swaps).  It then invested the savings in “absolute return” funds (funds of hedge funds in this case).  According to media reports and the plan’s own press release, it appears that it lost on both the swaps AND the absolute return funds in Q3.

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