After Poor Returns, Portable Alpha Falls out of Favor

(September 4, 2009) – In a further sign that portable alpha strategies are falling out of favor with institutional investors, the $2.7 billion Fire & Police Pension Association of Colorado has announced that it will scrap its program.

According to numerous sources, the fund—which was, among other losses, exposed to Bernie Madoff’s Ponzi Scheme—will drop the strategy (meant to hedge out risk exposure to an underlying market and rely on manager skill to create excess alpha) because it failed to meet its performance targets.

The Colorado fund had used hedge funds-of-funds managers Gottex Fund Management and GAM. GAM will be rolled into an absolute-return category, according to Pensions & Investments; the fund’s connection to Gottex ceased to exist in May. With these closures and cutbacks in equities and fixed-income—and pending approval come September—the fund plans to carve out allocations to absolute return and opportunistic strategies focusing on more illiquid holdings.

This move away from portable alpha mirrors that taken by another American pension fund, the $39 billion Massachusetts Pension Reserves Investment Management board (MassPRIM), which four weeks ago stated that it would no longer use portable alpha manager following a poor 2008 performance. For the three years MassPRIM used the strategy, annualized losses were nearly 19%, with fiscal year 2008 (ending June 30) losses amounting to nearly 50%.

New England Pension Consultants (NEPC) also has lowered expectations for the strategy, as has one of its clients, South Carolina Retirement Systems, according to the Money Management Newsletter. The Pennsylvania State Employees Retirement System also has made moves to divest from the asset class.