Key Takeaways
- • San Diego County Employees' Retirement System (SDCERS) and consultant Aon have decided to allocate 2-4% of the pension's $8.3 billion portfolio to managed futures strategies as part of a diversification initiative.
- • SDCERS rejected alternative risk premia strategies in favor of managed futures, citing concerns about complexity, limited historical performance data during market downturns, and higher manager dispersion risk among alternative risk premia providers.
- • Managed futures strategies are expected to generate annual returns of 6-12% through momentum-based trading in futures and forward contracts, with historically low correlation and beta to global equities.
- • Aon's analysis highlighted managed futures as a strong diversifier during market stress periods, including the 2008 financial crisis, the 9/11 attacks, and Black Monday, where the strategy outperformed traditional asset classes.
- • The pension system's investigation prioritized low correlation to traditional assets, downside protection, attractive risk/return profiles, and transparent, liquid alternative investments over complex strategies with untested crisis performance.
Summary
The San Diego County Employees' Retirement System has concluded a multi-meeting strategic review to determine how best to diversify its $8.3 billion portfolio, ultimately selecting managed futures as its preferred alternative strategy. Working alongside consultant Aon, SDCERS evaluated both managed futures and alternative risk premia approaches before determining that managed futures better aligned with the pension's diversification objectives and risk management priorities.
The decision reflects a deliberate rejection of alternative risk premia strategies despite their conceptual appeal. SDCERS and Aon determined that alternative risk premia strategies introduced unnecessary portfolio complexity, possessed limited historical track records during major market dislocations, and exposed the fund to elevated manager risk due to significant performance dispersions among interviewed managers. In contrast, managed futures strategies offered a more established, transparent approach to achieving diversification goals.
Aon's supporting analysis emphasized managed futures' primary benefit: low long-term correlation and beta to global equities, making the strategy a reliable portfolio diversifier during periods of economic stress. The consultant's research documented strong relative performance during three major market crises—the 2008 financial collapse, the September 11 terrorist attacks, and Black Monday—where managed futures substantially outperformed traditional asset classes. The strategy operates predominantly through momentum-based trading using futures and forward contracts, with expected returns ranging from 6-12% annually.
SDCERS is now evaluating the portfolio impact of implementing a 2-4% allocation to managed futures on the total fund. This modest allocation size reflects a measured approach to the alternative strategy, allowing the pension to capture diversification benefits while limiting concentration risk in a single alternative asset class. The selected allocation range aligns with institutional investor best practices for liquid alternative exposures within larger balanced portfolios.
The decision reflects a deliberate rejection of alternative risk premia strategies despite their conceptual appeal. SDCERS and Aon determined that alternative risk premia strategies introduced unnecessary portfolio complexity, possessed limited historical track records during major market dislocations, and exposed the fund to elevated manager risk due to significant performance dispersions among interviewed managers. In contrast, managed futures strategies offered a more established, transparent approach to achieving diversification goals.
Aon's supporting analysis emphasized managed futures' primary benefit: low long-term correlation and beta to global equities, making the strategy a reliable portfolio diversifier during periods of economic stress. The consultant's research documented strong relative performance during three major market crises—the 2008 financial collapse, the September 11 terrorist attacks, and Black Monday—where managed futures substantially outperformed traditional asset classes. The strategy operates predominantly through momentum-based trading using futures and forward contracts, with expected returns ranging from 6-12% annually.
SDCERS is now evaluating the portfolio impact of implementing a 2-4% allocation to managed futures on the total fund. This modest allocation size reflects a measured approach to the alternative strategy, allowing the pension to capture diversification benefits while limiting concentration risk in a single alternative asset class. The selected allocation range aligns with institutional investor best practices for liquid alternative exposures within larger balanced portfolios.
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