CalPERS First to License Ermitage HF Software; Abandons 'Name-and-Shame' Listing

(November 16, 2010) — The largest US pension has purchased the rights to use technology from a European hedge fund to revise the way it manages its equities and bond portfolios.

The California Public Employees’ Retirement System (CalPERS), valued at $218.8 billion as of November 13,  signed an agreement to license proprietary portfolio management software, known as OPTICS, from Jersey-based Ermitage.

The implantation of the software by the giant CalPERS across its long-only and absolute return portfolios marks a major change in the way the pension views portfolio construction, as large institutional investors reevaluate the way they manage their portfolios following the 2008 downturn. While pensions usually invest for the long-term, the new system would create a portfolio that would trade more frequently.

OPTICS has been developed over a four-year period and allows Ermitage to build portfolios to client-specified risk-return objectives, taking into account important requirements such as geographical/sector exposure, liquidity, and transparency. According to Ermitage, the approach is gaining traction in the US and the hedge fund manager said it will look to offer the OPTICS to schemes in Switzerland and the UK in 2011.

Ian Cadby, Ermitage Group CEO commented in a statement: “We are delighted that CalPERS has chosen to be our first external partner for our OPTICS system…interest from institutional investors seeking an effective ‘real world’ portfolio management solution led to Ermitage accelerating its external partner program. The problem for many institutions is that they struggle to combine the often disparate views of their various advisors, consultants and product providers into one overall portfolio view that takes into account more than just the current environment.” Cadby added that his firm’s vision is to partner with a select group of global institutions who can use OPTICS to combine traditional long only assets with alternative hedge fund products, creating a more integrated view of portfolio construction and risk management.

In other news, the Sacramento-based fund will cease releasing its annual Focus List of underperforming stocks, abandoning its “name-and-shame” listing in favor of a more private approach. The action is backed up with evidence from CalPERS consultant Wilshire Consulting of Los Angeles, which showed that 159 companies contacted privately between 1999 and 2008 significantly outperformed 59 companies on the public Focus List over five-year periods, compared with market benchmarks.

“The Focus List has served us well by calling public attention to some of the worst market players,” said CalPERS Board President Rob Feckner in a statement, “but the time has come for a more effective approach.”