Key Takeaways
- • Hawaii Employees' Retirement System allocated $1.6 billion (of its $15 billion portfolio) to cash-secured put-writing strategies in late 2016, partnering with Neuberger Berman and Analytic Investors to reduce portfolio risk while lowering fees compared to traditional hedge fund allocations.
- • Cash-secured put writing—in which investors sell put options on indices to counterparties seeking downside protection—allows pension funds to collect premiums regardless of market conditions while maintaining full collateralization through segregated accounts holding cash or short-term Treasuries.
- • Major public pension plans including Hawaii and South Carolina are deploying fully collateralized, non-leveraged options strategies as a cost-effective alternative to hedge funds, motivated by disappointing hedge fund performance and pressure to reduce fee expenses.
- • The strategy guarantees sufficient capital reserves to cover maximum losses (indexed to S&P 500), with cash held separately from the options contracts themselves, eliminating counterparty risk and providing downside certainty.
- • New Mexico's pension plan is also exploring put-writing strategies, driven by the dual objectives of achieving lower portfolio volatility and securing cheaper fee structures than traditional hedge fund managers offer.
Summary
Public pension funds are increasingly turning to options-based hedging strategies as a lower-cost alternative to traditional hedge funds, which have faced criticism for charging high fees while delivering mediocre returns. The Hawaii Employees' Retirement System and South Carolina Retirement System Investment Commission have both recently adopted cash-secured put-writing strategies—a once-obscure tactic that is gaining institutional traction. Hawaii's allocation of $1.6 billion out of its $15 billion total portfolio represents a significant commitment to this approach, executed through managers including Neuberger Berman and Analytic Investors.
Cash-secured put writing operates on a straightforward principle: the pension fund sells put options on an index to counterparties (typically equity investors) who seek insurance against market downturns. The pension fund collects the premiums from these sales regardless of market movements. If the underlying index declines, the pension fund is obligated to purchase the index at the strike price, effectively covering the counterparty's losses. This strategy generates consistent income while simultaneously hedging downside risk.
The mechanics are designed to eliminate counterparty and liquidity risk. All capital deployed into these options strategies is fully collateralized through segregated accounts, often holding cash or short-term Treasuries alongside the options contracts themselves. If a pension fund commits $100 million to an S&P 500 options strategy, that full amount remains reserved and accessible to cover maximum potential losses—theoretically, if the index fell to zero. This structural safeguard contrasts sharply with traditional hedge fund arrangements, where capital may face extended lock-up periods and concentration risk.
Vijoy Chattergy, chief investment officer of the Hawaii pension plan, framed the options allocation as a risk-reduction measure for the overall portfolio. Beyond the risk-management benefits, pension funds face mounting pressure to control costs. Hedge fund fee structures—typically 2% of assets under management plus 20% of profits—have become increasingly difficult to justify, particularly when performance has lagged broad market indices. By shifting capital into options strategies managed by traditional asset managers, pensions can access portfolio protection at materially lower fees while avoiding leverage, which preserves capital efficiency.
The adoption of fully collateralized put-writing by multiple large public plans signals a broader shift in how institutional investors approach tail-risk hedging. New Mexico's pension plan is among other public funds evaluating similar strategies, suggesting this approach may gain broader adoption as pension administrators seek to balance return objectives with fiduciary cost-consciousness and volatility reduction.
Cash-secured put writing operates on a straightforward principle: the pension fund sells put options on an index to counterparties (typically equity investors) who seek insurance against market downturns. The pension fund collects the premiums from these sales regardless of market movements. If the underlying index declines, the pension fund is obligated to purchase the index at the strike price, effectively covering the counterparty's losses. This strategy generates consistent income while simultaneously hedging downside risk.
The mechanics are designed to eliminate counterparty and liquidity risk. All capital deployed into these options strategies is fully collateralized through segregated accounts, often holding cash or short-term Treasuries alongside the options contracts themselves. If a pension fund commits $100 million to an S&P 500 options strategy, that full amount remains reserved and accessible to cover maximum potential losses—theoretically, if the index fell to zero. This structural safeguard contrasts sharply with traditional hedge fund arrangements, where capital may face extended lock-up periods and concentration risk.
Vijoy Chattergy, chief investment officer of the Hawaii pension plan, framed the options allocation as a risk-reduction measure for the overall portfolio. Beyond the risk-management benefits, pension funds face mounting pressure to control costs. Hedge fund fee structures—typically 2% of assets under management plus 20% of profits—have become increasingly difficult to justify, particularly when performance has lagged broad market indices. By shifting capital into options strategies managed by traditional asset managers, pensions can access portfolio protection at materially lower fees while avoiding leverage, which preserves capital efficiency.
The adoption of fully collateralized put-writing by multiple large public plans signals a broader shift in how institutional investors approach tail-risk hedging. New Mexico's pension plan is among other public funds evaluating similar strategies, suggesting this approach may gain broader adoption as pension administrators seek to balance return objectives with fiduciary cost-consciousness and volatility reduction.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.