WRS News Online

Why Active Management Matters

The State of Wisconsin Investment Board has long been considered a low-cost pension fund manager that provides solid returns for the Wisconsin Retirement System. One way SWIB manages its costs effectively, provides respectable returns, and helps protect the WRS from another market downturn is through a combination of active and passive management of the trust funds.

Active management refers to a portfolio management strategy where the manager makes specific investments using analytical research, forecasts, and his or her own judgement and experience with the goal of outperforming similar investments in the market. Passive management, also known as indexing, is a style of management that attempts to match the results of a basket of investments such as the S&P 500. Passive management strives to equal what the market delivers.

SWIB's use of both active and passive management varies by the type of investment and depends on market efficiencies and management options. SWIB employs an active management strategy that is intended to produce value added over and above passive investments. Over time, SWIB has shown an ability to produce active returns and generate value above what the market generates for the benefit of the trust funds and the beneficiaries.

Over the past five years, SWIB has generated valued added in excess of $1.2 billion, which helps pay benefits and defray costs of administering the retirement system.

SWIB's multi-pronged approach to active management spans many different strategies to ensure there is a well-balanced approach to generate value added. One strategy that SWIB uses for active management is hedge funds. From our point of view, hedge funds are active managers with broader ability to produce value added over time.

So, what is a hedge fund? Hedge funds are investment partnerships between a fund manager and investors. Investors, like SWIB, contribute money to the fund, which the manager invests according to the fund's specific strategy. Hedge funds can invest in anything including land, real estate, stocks and currencies. This is different than a mutual fund which typically holds only stocks or bonds.

SWIB's approach is different than that of many peers that have recently decreased or eliminated their hedge fund allocations. Many of them were using hedge funds to generate returns they could have achieved less expensively by passively managing the funds. SWIB seeks out hedge funds that generate active management returns. By using hedge funds as part of a broader strategy focused on producing active returns above passive stock and bond market performance, we are better able to generate extra returns.

SWIB began investing in hedge funds in 2011. Since those initial investments, we have been taking a thoughtful and prudent approach to increasing hedge fund investments as part of a broader approach to active management.

SWIB closely monitors its hedge fund investments and requires a high level of transparency from the managers. The managers are required to provide audited financial statements, exposure reports, and performance and strategy updates. As part of the monitoring and reporting process, SWIB partners with an independent organization to perform risk analytics, modeling and reporting on hedge fund holdings.

Hedge funds, as part of SWIB's overall investment strategy, are helping to grow and protect the assets of the WRS.