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Bd. Min 9-28-17; Amended Bd. Min. 6-29-23; Amended Bd. Min. 9-12-24.

1. Introduction – This policy establishes general guidelines for asset classes and associated implementation matters for the following investment pools:
   
   140.012 General Pool [Sections D(2) "Cored Portfolio" and  D(3) “Strategic Portfolio”]
   140.013 Endowment Pool
   140.015 Retirement, Disability and Death Benefit Plan
2. Responsibilities and Authorities – See CRR 140.010 “Policy for Management and Oversight of Selected University Investment Pools.”
3. Asset Class Guidelines – The following asset class descriptions and guidelines may be applicable to investment pools noted above, as specified by targets and ranges within each individual policy. The intent of this section is to provide descriptions and general implementation guidelines for each of the following asset classes:
   
   1. Public Equity
      The equity risk factor drives the returns of this class. Currency risk may also be present when investing in non-U.S. securities. Investments in this asset class may include U.S. and non-U.S. equity investments, including both long and long/short strategies with varying characteristics related to market capitalization, style and sector.
      
      Exposure will be obtained through physical securities and/or conventional derivative instruments commonly accepted by other institutional investors such as futures, swaps, options, forward contracts and reverse repurchase agreements. Public Equity exposures may be used to fund a Portable Alpha Program. Legal account structures may be in the form of separately managed accounts, institutional commingled funds, exchange-traded funds and limited partnership agreements.
   2. Private Equity
      These investments are primarily driven by the equity and liquidity risk factors yet, because of their diverse nature, some of these investments may include currency risk and other idiosyncratic risks.
      
      Investments in this asset class may include U.S. and non-U.S. private equity strategies including, but not limited to, buyout, venture, and special situations. Legal account structures will primarily be in the form of limited partnership agreements or other similar forms with average tenure of 10-12 years.
   3. Sovereign Bonds
      Interest rates and inflation are the primary risk factor driving the returns of this sub-class of securities. Currency risk may also be present when investing in non-U.S. Government Securities.
      
      Investments in this asset class may include U.S. and non-U.S. bonds that have been issued, collateralized or guaranteed: (i) by the U.S. Government, its agencies, or its instrumentalities (collectively known as U.S. Government Securities) or (ii) by investment grade non-U.S. sovereign governments, their agencies or their instrumentalities (collectively known as non-U.S. Government Securities).
      
      Exposure will be obtained through physical securities and/or conventional derivative instruments commonly accepted by other institutional investors such as futures, swaps, options, forward contracts and reverse repurchase agreements. Sovereign Bond exposures may be used to fund a Portable Alpha Program.
      
      Legal account structures may be in the form of separately managed accounts, institutional commingled funds, exchange-traded funds and limited partnership agreements.
   4. Core Fixed Income
      Specific types of debt exposures include, but are not limited to, sovereign, corporate, inflation-linked, high yield, emerging market, commercial mortgage-backed securities, and residential mortgage-backed securities.
      
      Exposures will be obtained through physical securities as well as derivative instruments commonly accepted by other institutional investors such as futures, swaps, options, forward contracts, and reverse repurchase agreements may be utilized. Exposures may include long/short positions.
      
      Legal account structures may be in the form of separately managed accounts, institutional commingled funds, exchange-trade funds and limited partnership agreements.
   5. Opportunistic
      It is expected that this category will be utilized when market dislocations present unique opportunities to invest at attractive valuations relative to underlying fundamentals across a variety of risk factors and implementations.
      
      No policy target shall be assigned to this category; any capital allocated to this category will be funded from underweight positions relative to policy targets in other asset classes, with the expectation that such opportunistic investments should outperform and/or strengthen the overall diversification of the total portfolio over a given timeframe. Investments in this category should be shorter-term in nature, with final maturities not to exceed seven years.
      
      Exposures may be obtained through public and private securities in various forms and implementations as well as derivative instruments commonly accepted by other institutional investors such as futures, swaps, options, forward contracts, and reverse repurchase agreements may be utilized. Implementations may hold a mix of long/short positions.
      
      Legal account structures will be in the form of separately managed accounts, institutional commingled funds, limited partnership agreements or other similar forms.
   6. Private Debt
      Credit spreads and liquidity risk will be the primary drivers of returns, while interest rate and equity risk may also be present from time to time. Currency risk may also be present when investing in non-U.S. securities, as well as other idiosyncratic risks.
      
      Specific types of strategies include, but are not limited to, opportunistic debt, distressed debt, distressed for control, whole loans and pools, levered loans and pools, and mortgage servicing rights.
      
      Legal account structures will primarily be in the form of limited partnership or limited liability company agreements with average tenure of 5-12 years.
   7. Commodities
      This asset class is driven by changes in expectations for inflation and the supply of and demand for raw materials.
      
      Investments in the asset class are likely to be made through derivative instruments commonly accepted by other institutional investors such as futures, swaps, options, and forward contracts. From time to time, physical securities of raw material companies and/or companies that produce raw materials may be held. Implementations may hold a mix of long/short positions. Commodity exposures may be used to fund a Portable Alpha Program.
      
      Legal account structures may be in the form of separately managed accounts, institutional commingled funds, exchange-traded funds and limited partnership agreements.
   8. Risk Balanced
      This asset class is driven by multiple traditional risk factors including equities, interest rates, commodities, credit spreads and inflation. In most instances, some or all of these factors are balanced in a way that attempts to equalize risk exposures within a portfolio. Additionally, non-traditional risk factors including value, momentum, carry, defensive and trend may be included. It is also expected that idiosyncratic (active) risk will be taken in this portfolio from time to time.
      
      Exposure will be obtained through physical securities and/or conventional derivative instruments commonly accepted by other institutional investors such as, futures, swaps, options, forward contracts and reverse repurchase agreements.
      
      Legal account structures will primarily be in the form of separately managed accounts, institutional commingled funds and limited partnership agreements.
   9. Real Estate/Infrastructure
      These investments may be driven by multiple risk factors depending on how they are positioned in the capital structure. Equity, credit, inflation and liquidity will generally be the primary risk factors. Non-U.S. investments may also possess currency risk.
      
      Specific types of fund investments may be structured as equity and/or debt and include categories broadly defined as core, value added, and opportunistic. In addition, investments may be made in real estate investment trusts and master limited partnerships from time to time.
      
      Legal account structures will primarily be in the form of limited partnership agreements with average tenure of 10-12 years. Separately managed accounts and institutional commingled funds may also be utilized from time to time.
4. Portable Alpha Program – when any combination of market beta exposures are obtained through the use of derivative instruments, a portion of the cash underlying the notional exposures may be used to fund an Alpha Portfolio. At a total portfolio level, the objective of a Portable Alpha Program is to generate excess returns through alpha exposures which, in aggregate, are diversifying to the total portfolio overall.
   
   1. Definitions
      
      1. Market Beta Exposure – obtained through owning some broad representation of a given market, usually tracked by a benchmark or index. Within Retirement, Endowment and General Pool, examples of market beta exposures include public equities, sovereign bonds, commodities, and other public debt markets. Common ways to obtain market beta exposures include passive or actively managed mutual funds, ETFs or separate accounts holding individual investment securities.
      2. Derivative Instruments – market beta exposures may also be obtained with derivative instruments commonly used by other institutional investors, such as futures, swaps, options, forward contracts and reverse repurchase agreements.
      3. Notional Exposure – when derivative instruments are used to obtain market beta exposures, the market exposure obtained is not directly connected to the amount of cash required to obtain such market exposure. For example, obtaining a $100 million exposure to the S&P 500 using futures could be done with an initial cash outlay of less than $5 million. In the context of this Portable Alpha Program, $100 million of notional exposure would be initially funded with $100 million in cash. The key takeaway is that with a derivatives implementation of market beta exposures, part of the cash underlying the notional exposure is available to fund other types of investment exposures, such as alpha.
      4. Alpha Portfolio - Alpha represents investing skill that generates returns alongside, or independent of, a given market beta exposure. For purposes of the Portable Alpha Program, the Alpha Portfolio represents a collection of highly skilled alpha managers able to source alpha independent from a market beta exposure. Alpha managers utilized within the Alpha Portfolio should be well established and highly institutionalized, have satisfactory liquidity terms, maintain robust risk management systems, and have a demonstrated ability to deliver return streams with generally low volatility and very low correlations (no discernable relationship) to the market beta exposures used to fund the Portable Alpha Program. Common alpha strategies likely contain well-known, empirically tested sources of returns that can be actively or systematically harvested through both long and short implementations including, but not limited to:
         
         1) hedge fund risk premia such as arbitrage, macro, credit, and equity long/short;
         2) style risk premia such as value, momentum, carry, defensive and low volatility;
         3) other idiosyncratic sources of return.
         
         Legal account structures will be in the form of separate accounts, institutional commingled funds, limited partnerships or other similar forms. The overall mix of investment vehicles and fund structures should allow for at least 20% of the Alpha Portfolio to be redeemed for cash within 90 days, with a minimum of 50% available for cash redemption within six months.
   2. Understanding Liquidity Needs / Cash Margin
      The primary need for liquidity within the Portable Alpha program is the settlement of gains and losses from the mix of market beta exposures implemented through derivatives, which are used to fund the program. To help illustrate this concept: Assume a $70 million Alpha Portfolio funded by $100 million in US Treasuries (a market beta exposure). Derivatives would be used to obtain $100 million notional in US Treasuries market beta exposure. Of the $100 million in underlying cash, $70 million is used to fund the Alpha Portfolio with the remaining $30 million held in cash (“Cash Margin”). The Cash Margin is needed to settle gains or losses on the derivatives used to obtain the $100 million notional US Treasuries market beta exposure.
      
      As a simplistic example, if US Treasuries gained 10% over a given period, Cash Margin would increase by $10 million ($100 million notional x 10% gain). But if US Treasuries lost 10% over a given period, Cash Margin would decrease by $10 million ($100 million notional x 10% loss). Overall, Cash Margin should be sufficient to cover potential losses in the market beta exposures implemented through derivatives and used to fund the Alpha Portfolio. More specifically, liquidity needs are driven by the market beta exposures funding the Portable Alpha Program, not the Alpha Portfolio itself.
   3. Sources of Cash Margin
      The following are sources of Cash Margin for the Portable Alpha Program:
      
      1. Cash balances underlying the market beta exposures obtained through derivatives implementation (for example, the $30 million in the illustration noted in the section above).
      2. Any unencumbered cash balances held at the total portfolio level, which have been specifically dedicated to the Portable Alpha Program.
      3. Any balances of passive market beta exposures held in ETFs or mutual funds which could be settled (cash received) within three business days. For sake of clarity, assume that the Alpha Portfolio was funded by notional US Treasury exposure. Further, assume that the portfolio had additional US Treasury market beta exposure through an index mutual fund, which could be traded with cash settlement within three business days. Under this provision, using this example, the amount invested in the US Treasury index mutual fund could be counted fully or partially as available Cash Margin. From a practical perspective, these passive mutual fund or ETF holdings could be quickly converted to notional derivative exposures (without changing the portfolio’s overall market beta exposure), making the underlying cash available for the Portable Alpha Program. Having the flexibility to manage market beta exposures in this way can reduce the financing costs associated with derivative notional implementations while maintaining ready access to cash (liquidity).
      4. Cash redemptions from Alpha Portfolio managers.
   4. Measuring / Testing Liquidity Needs
      With the Portable Alpha Program being funded by a derivatives implementation of some mix of market beta exposures, the measurement and testing of liquidity needs involves assessing how the given mix of these asset classes performs across a representative sample of historical economic and market stress scenarios. In managing liquidity needs, the objective is for the Cash Margin to “survive” these modeled scenarios with some minimum level of Cash Margin remaining after the stressed scenario has occurred. For purposes of this policy, Cash Margin sufficiency shall be determined by taking an average of the five worst modeled scenarios as defined as those scenarios having the greatest depletion of Cash Margin. To be clear, assuming the five worst modeled scenarios consumed 5%, 6%, 8%, 10% and 16% of Cash Margin, the average of these five would be Cash Margin depletion of 9%. The minimum Cash Margin requirement would be 9% plus some additional safety buffer, which would be defined individually in the investment policies for the Retirement, Endowment and General Pool portfolios.
   5. Managing Liquidity Needs
      There are generally six primary ways to manage Cash Margin and liquidity needs during times of market stress. Any of these, or some combination, may be used depending upon the circumstance.
      
      1. Utilize existing cash balances underlying the market beta exposures obtained through derivatives implementation.
      2. Utilize unencumbered cash balances held at the total portfolio level, if any, which have been specifically dedicated to the Portable Alpha Program.
      3. Convert passive market beta exposures held in ETFs or mutual funds to market beta exposures obtained through derivatives implementation to generate additional cash. As an example, $50 million in US Treasury index exposure held in a mutual fund could be redeemed and replaced with a derivatives implementation providing the same market beta exposure while making the $50 million of underlying cash available to the Portable Alpha Program.
      4. If possible, rebalance the mix of market beta exposures funding the Portable Alpha Program from more volatile asset classes to less volatile asset classes. For example, in a period of equity market drawdown, shifting some mix of Alpha Portfolio funding from public equities to sovereign bonds would lower the volatility of the funding mix, reducing the drawdown exposure and resulting demands on the Cash Margin.
      5. Selective redemption requests to Alpha Portfolio managers will generate additional Cash Margin.
      6. Reducing or eliminating notional market beta exposures obtained through derivative instruments will immediately stop further draws on remaining Cash Margin. For example, if the Portable Alpha Program were funded primarily by public equity notional exposure during a period of equity market drawdown, consideration could be given to eliminating the derivatives equity position through cancellation of the swap, liquidating the futures, etc. Careful consideration should be given to this option as it also eliminates strategic market beta exposure for the portfolio overall; still, this de-risking option may be desirable in times of significant market stress.
   6. Operational Requirements
      
      1. Minimum required Cash Margin balances for each portfolio shall be determined, maintained, and monitored on a daily basis by investment staff.
      2. Modeling of historical economic and market stress scenarios shall be updated by investment staff on a monthly basis utilizing the then current mix of market exposures funding the Portable Alpha Program (which should also include any passive market beta exposures implemented through mutual funds or ETFs which are being included in the Cash Margin calculation).
      3. Should Cash Margin fall below minimum required levels, investment staff shall enact a plan to restore Cash Margin above minimum required levels as quickly as reasonably possible, but within a period of time not to exceed six months. The plan to restore Cash Margin above minimum required levels should be communicated to the Executive Vice President for Finance and Operations and to the University’s Investment Consultant.
      4. The results of modeled economic and market stress scenarios and compliance with Cash Margin and Alpha Portfolio liquidity requirements shall be reported to the Board on a quarterly basis.