"Top US pension fund aims to juice returns via $80bn leverage plan"

The huge move up in equities since the recent lows was as much about bailing out the giant public-employee pension plans as it was about the Fed and the government pumping liquidity into the real economy.
All through 2007 - 2010 we were posting on how underfunded the California plans, CalPERS and CalSTRS were, how ridiculous the assumed rates of future returns were (the higher the assumption the smaller current pot-o-gold needed for the actuaries and accountants to sign off), just how huge the chasm between the vote-buying politician's promises to the public employees vs the cost of said promises those same politicians told the taxpayers they would have to pay.
We posted on this crap to the point I got sick and tired of wading into the politico-financial depravity.

Yet here we are.
Along with the Financial Times and ZeroHedge.
Via ZH, June 15: 

Calpers To Use $80 Billion In Leverage To Hit 7% Return Target
Did Calpers just call the peak in the Fed-blessed bond bubble which has seen a record $1.1 trillion in new issuance in 2020?

The $395 billion California public pension giant, best known for unwinding its market hedges at the all time highs just days before the March crash giving up on a $1 billion payday, which has failed to hit its return bogey for much of the past decade is reportedly set to take on substantial leverage via borrowings and financial instruments such as equity futures, the FT reports, noting that leverage could be as high as 20% of the value of the fund, or nearly $80bn based on current assets. The purpose of all this extra debt is to juice up returns of Calpers and help it achieve its growth target.
Calpers decision was almost certainly predicated by the Fed's explicit backstop of debt, with the central bank now purchasing both IG and Junk ETFs and soon set to buy corporate bonds outright limiting - in Calpers view - the downside risk on this leverage plan.

The stunning shift was unveiled in a presentation to the Calpers board by chief investment officer Ben Meng, and comes after a 2019 investment strategy review "that found Calpers needed greater focus on the excess returns potentially available from illiquid assets compared with public equity and debt. Under Calpers’ previous asset allocation strategy it was estimated to have a less than 40% probability of achieving its 7 per cent return target over the next decade."

"Given the current low-yield and low-growth environment, there are only a few asset classes with a long-term expected return clearing the 7 per cent hurdle. Private assets clearly stand out," Meng said. “Leverage will increase the volatility of returns but Calpers’ long-term horizon should enable us to tolerate this.” He added that leverage would not “be tied to any specific strategy, asset, fund or deal”.

According to the FT, Calpers’ portfolio has also been de-risked by increasing its holdings in longer-dated US Treasuries and switching more assets from capitalisation-related equity indices to factor-weighted equities. These use indices that focus on investment styles such as price momentum or volatility, which have suffered dramatic volatility since the March crash.

According to Mr Meng this strategy protected the fund from losses of $11bn in the pandemic-induced market slide, which far outweighed the $1bn profit forgone on tail risk hedging. He said that unlike in the financial crisis of 2008 Calpers was not forced to sell assets into a depressed market in March. “Too little liquidity can be deadly but too much is costly,” he said.

So to make sure that it not only does not achieve its 7% bogey but suffers massive losses in the next financial crisis, the pension giant is now levering up with stocks not too far from all time highs, and with bond yields once again near all time lows, a combination which ensures that California's pensioners will not only not have fully funded pensions, but will suffer major losses on their current life savings.

Adding insult to injury, the FT reminds us that Calpers’ assets represent just 71% of what it needs to pay future benefits to the 1.9m police officers, firefighters and other public workers who are members of the scheme.

The US stock market slide this year has increased the long-term structural problems across the entire US public pension system, particularly for the weakest plans that have ballooning unfunded liabilities. In fact, some speculate that "Central Banks Bailed Out Markets To Avoid Trillions In Pension Losses."

 ...MORE

Here's the FT: "Top US pension fund aims to juice returns via $80bn leverage plan"

Despite the fact bond returns have been dropping for over thirty years and for the last eleven years have been so low that even a 30:70 bond/equity portfolio, much less a 60:40 split, that portfolio has no chance of making the 8.5% return assumptions we entered the Great Recession with. 

So, after mocking and semi-doxxing the folks pointing this out, CalPERS dropped to 7.5%.
When it was pointed out that with a 50:50 portfolio making 1% on its bond portion a 14% annual return in the equities was needed (over 20 and 30 year time horizons) just to make the math work CalPERS eventually went to the 7% ref'd above.

The backstop for the plans should they fail to make the required  returns is to raise taxes.
The politician's promises are contractual obligations and one way or another the states and municipalities will do whatever they can to avoid abrogating those contracts.

California pols know that if they were to tax at the rate required they would exacerbate the flight of the very taxpayers they need to fund the whole edifice. 

So now CalPERS is going to roll the dice on leverage, knowing they will go back to the taxpayers when it fails.

All of which reminds me of one of our posts from 2008, when the innately-leveraged long-only commodities bets and the innately-leveraged real estate losses couldn't be hidden.
What did CalPERS do?
They started selling their most liquid equities at/near the bottom, just to stay liquid enough to make currently due monthly pension payments:
"Calpers Sells Stock Amid Rout to Raise Cash for Obligations":

This is hedge fund behavior, selling your most liquid investments to prop up the illiquid....

...At the same time PrivateEquityRealEstate is reporting the pension behemoth has found a fund with really good projections:

CalPERS invests $400m in Sternlicht’s latest fund

The California pension has committed $400 million to Starwood’s $3bn Global Hospitality Fund II, which is targeting 20% IRRs. This summer, Sternlicht said he was rapidly expanding his latest hotel brand: the Baccarat, based on the famous crystals....

 We have so many posts on the outright fraud that is the public employee pension plan's expected rate of return assumptions and pronouncements that it's probably easiest just to do a Google search of the site:

site:climateerinvest.blogspot.com calpers 

Where one will find such tidbits as:

...Following up on January's "CalPERS Earns 1.1% in Calendar 2011, a Bit Less Than the 7.75% They Need".... As that post, and others, goes on to say, the embedded assumptions in the 1999 pension law, SB 400, are 25,000 on the Dow Jones Industrial Average by 2009 and 28,000,000 by 2099.