The options strategy implemented by Vijoy Chattergy, the former chief investment officer of the $17 billion Honolulu-based Employees’ Retirement System of the State of Hawaii (HIERS), which targets equity like returns with 2/3 the volatility of equities over a full market cycle, is still performing well, even after his departure. “Today the strategy remains fully collateralized, and the board and management are comfortable with it, because it has proven to perform over time,” said Chattergy. “It continues to be successful, since I left.”
How successful is the strategy, so far? “We are on track to achieve our 7% return goal for this fiscal year, which ends on June 30th,” said Howard M. Hodel, acting chief investment officer at the system. “We won’t know our return for the first half of calendar year 2018 until after that date, but through March 31st our fiscal year-to-date return was 6.94%,” he said. The fund’s investments posted a 16.1% gain in calendar year 2017.
Chattergy left HIERS in February under a cloud of speculation concerning his departure. News reports stated that he was let go due to a hit the fund’s portfolio took during a spike in equity market volatility earlier this year. But a second look shows that the strategy he implemented did exactly what it was supposed to do—curb loses. From Jan 25 to Feb 8, the Hawaii system was down 6%, while U.S. equities were down 11-12%. For calendar year 2018 through February 8, HIERS was down 1% while equities were down around 2%. Chattergy and Hodel declined to comment on Chattergy’s departure. See related story.
Chattergy joined HIERS as an investment specialist in 2011 and was appointed CIO in late 2012. He brought with him experience in investing in strategies that use options. Prior to joining HIERS, Chattergy was a fund-of-hedge funds manager at asset manager SPARX Investments, based in Tokyo and Hong Kong. The big question for the new HIERS CIO, at the time, was how to bring an options program to a board that was wary of it at best and had to be convinced to move forward, according to Chattergy.
Investment consultant Pension Consulting Alliance (PCA) was hired by the system in 2008, and presented the idea of using options, which was later approved by the fund’s board and implemented by staff in 2010. The consultant was crucial in introducing and implementing the options strategy at the retirement system, Chattergy noted.
The move to include options in HIERS’ portfolio originally came in response to the financial crisis in 2008. The question was asked: “What kind of risk are we taking?” Chattergy said. “We were invested in equities entirely, with active stock pickers at the time, and knew we needed to diversity and differentiate growth and risk strategies,” he said. “We had used long-only stock pickers exclusively, but now added more structured and non-discretionary strategies,” he said.
Chattergy educated himself about the asset class in 2011, by reading industry White papers and talking with investment managers, he said. He first hired investment manager Gateway Investment Advisors, based in Cincinnati, Ohio to manage a covered-call strategy. And later, in 2016, he added investment managers UBS, based in Zürich and Basel, and NYC-based Neuberger Berman to incorporate cash-secured put writing into the strategy.
We were invested in equities entirely, with active stock pickers at the time, and knew we needed to diversity and differentiate growth and risk strategies.
The long haul
Overall, “the long-term investment horizon, total portfolio context, and using zero leverage has resulted in equity comparable returns with much less risk. The addition of option selling strategies have dramatically improved Hawaii’s risk-adjusted return profile, making the pension fund’s investment portfolio more stable and less risky, despite the moment in time losses from February 2018, when the entire equity market sold off,” Chattergy claimed.
As for why more pension funds don’t go this route? Chattergy is at a loss. “It’s a solid strategy backed by research and experience. Long-term investors like pensions funds should be comfortable selling options and riding out temporary volatility spikes to realize positive returns over a full market cycle,” he said.
Chattergy, who is still based in Hawaii, is currently consulting for a couple asset managers and a pension plan trade association, while evaluating his next move.