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Spotlight On Pensions Using Options
While public pension programs have traditionally stayed away from using options strategies in their portfolios, that is beginning to change.
This year, John Colville, Portfolio Manager, disclosed that he was successfully employing options on up to 66% on the equity portion of the City of Sacramento’s pension fund. We also learned that Tim Walsh, former Investment Director with New Jersey’s public pension system had similar success employing covered call options. Most recently we learned that CalSTRS intends to allocate to one or more managers a total of $150 million across both low volatility equity and covered call strategies. Upon evaluation of the performance of this initial allocation, CalSTRS may expand the program in terms of number of managers or capital invested.1
OIC and the Chicago Board Options Exchange (CBOE) provided CalSTRS with the necessary historical data to help researchers at CalSTRS explore the merits of a buy-write strategy. In addition OIC has made available independent research on covered calls and collars from the University of Massachusetts. More recently, OIC in consort with member exchanges has provided forums where pension fund managers already employing covered calls can impart their knowledge to other managers who have yet to consider options for their public pension funds.
Additionally, the CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. Ibbotson Associates conducted a case study of the investment value of the CBOE S&P 500 BuyWrite (BXM) Index from a total portfolio perspective and concluded that it and its Rampart investable version provide credible evidence of the investability of the BXM Index.2
OIC has co-hosted forums for pension fund managers and wealth advisors with the Philadelphia Stock Exchange (NASDAQ OMX PHLX) and the New York Stock Exchange (NYSE Euronext) on using options for risk mitigating and income generating purposes. Recently, Tim Walsh disclosed at the Philly Market Street Forum that his options-based strategy took in an additional $40 million in alpha for the calendar year 2012 for New Jersey’s public pension fund. Kevin Dugan at Ontario Teachers’ Pension Plan provided an equally compelling story last September at NYSE’s Thought Leadership Forum. Options-based strategies have been a mainstay in their portfolios for well over a decade and their retirement portfolios are nearly fully funded. Additionally, the Ontario Teachers’ Pension Plan has been highlighted in several pension specific journals as a model of efficiency throughout a very volatile past decade.
OIC began a dedicated effort to help educate institutional investors about the risks and benefits of listed options in 2005 with representatives reaching out to pension funds and other institutional investors. While the employment of an options strategy within pensions is still at its infancy, as more pensions demonstrate successful usage of options, we expect others will soon follow.
1 “Bridging the Gap”, by Peter Chapman, Traders Magazine, April 2013
2 Highlights from Case Study on BXM Buy-Write Options Strategy, Ibbotson Associates, 2004
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