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CalPERS limits derivatives use

In line with its recently-approved leverage policy, the $181 billion fund for Californian public employees, CalPERS, has reviewed its derivatives policy for global equities, with notional leverage constrained to a new limit of 10 per cent of the value of the global equities portfolio.

In addition, guidelines to implementing derivatives will be written to cover each derivative strategy in CalPERS’ investment office.

At a minimum those guidelines will include: the purpose of the derivative strategy; justification for the use of derivatives; a description of the risks inherent in the strategy and how they will be managed including pricing, liquidity and legal risk; and procedures for monitoring and managing the derivative exposure relative to the strategy including protocols for prompt reporting of the violation of limits.

This new derivatives policy brings the existing synthetic enhanced equity portfolios in line with the recently-approved leverage policy, which was adopted in May and set out various definitions of leverage and methods for monitoring leverage across all of CalPERS assets.

In the leverage policy, “notional leverage” is defined as “exposure to non-cash-like-securities, that exceeds the value of the capital employed”.

In the most recent asset allocation review, approved this month, the allocation to global equities was reduced to 49 per cent (from 56 per cent).

Within its internally managed enhanced equities portfolio, the investment team is permitted to use financial futures, equity swaps and options permitting the investment dividends received, equitise cash and dividends receivable; adjust portfolio risk characteristics in the most cost-effective manner; and facilitate investment of cash flows related to contributions, withdrawals, or asset allocation compliance.

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