Magazine article Modern Trader

Pension Fund Goes Long Futures

Magazine article Modern Trader

Pension Fund Goes Long Futures

Article excerpt


Eleven days before Christmas, Bear Stearns told the Virginia legislature that there are safe managed futures, and the state pension fund made five trading managers the present of quadrupling its funds under their management to $640 million, making it one of the world's largest managed futures programs.

So it seems peace may reign after an acrimonious dispute that arose last year over whether a $160 million program established in May 1991 threatened the safety of the $16 billion Virginia Retirement System (VRS) pension plan.

The Joint Legislature Audit Review Committee had hired Bear Stearns Fiduciary Services to examine the futures program and other elements of the pension plan. The consultant concluded the futures program had "sophisticated and extensive risk controls, reduced volatility" and had earned a good rate of return. Annualized returns were 9.84% per year, and annual volatility was 9.59%, for a risk-adjusted return of 1.03%. By comparison, the S&P 500 had slightly higher absolute returns (10.38%) but higher volatility (11.07%) for a lower risk-adjusted return of 0.94%.

The returns were largely uncorrelated to other asset classes the fund invests: specifically 0.16 correlation to the S&P 500; 0.48 to the Lehman Government/Corporate Bond Index; and 0.10 to the Russell NCREIF, a real-estate index.

"Since our program expectations were to earn the same return as stocks with lower risk, it met our expectations," says John McLaren, managing director at VRS. …

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