Pensions Move to Direct Hedge Fund Investments?

Via Pension Pulse.

Before
getting into my latest topic, I want to thank those of you who took
the time to write me after reading my last comment on the ugly truth.
Rest assured this blog is not my open diary but sometimes I like
delving deep into personal matters because I believe certain
frustrations, anxieties and worries are common and if by expressing my
thoughts, I can help someone else, so much the better. I have nothing to
ashamed of and if some people choose to use my openness against me,
then shame on them. The real ugly truth is that far too many people in
finance and business are money whores and would screw over anyone for
money. That's all I'll say about the ugly truth.

Now, onto the latest topic, direct investments into hedge funds. Christine Williamson of Pensions & Investments reports, Move to direct hedge fund investments boosting business for consultants:

The
pace of searches and hires is up sharply this year for specialist and
general consultants advising institutional investors on direct hedge
fund investments.

That increase is the result of the trend
toward direct investment in single and multistrategy hedge funds and
away from hedge funds of funds, especially by large public pension
funds, industry insiders say.

Among the pension funds that hired
their first consultants for specialist hedge fund and alternative
investment assignments so far this year:

• The $23 billion Employees Retirement System of Texas, Austin, hired Albourne Partners Ltd. in May.

• The $49.5 billion Massachusetts Pension Reserves Investment Management Board, Boston, hired Cliffwater LLC in April.

• Trustees of the $76 billion Ohio Public Employees Retirement System,
Columbus, hired Hewitt EnnisKnupp in April for alternative
investments, including hedge funds, but also signed a contract with Cliffwater to provide non-discretionary operational due diligence for a new $1.2 billion direct investment program.

• Three of the five pension funds in the New York City Retirement Systems — the $24.3 billion police fund, the $7.9 billion fire fund and the $41.2 billion employees' retirement system — hired Aksia LLC in January.

Succeeding

“In
the last 18 months, a lot of the groundwork has been laid through
intensive education for public and corporate pension plan trustees, and
now, clients are beginning to implement their direct investment
programs in hedge funds,” said Mary Bates, a senior hedge fund
consultant in Hewitt EnnisKnupp's Chicago office.

Market
observers said the pace of direct investment will accelerate further as
more experienced hedge fund investors pump more money into hedge
funds. For example, staff of the $109.1 billion Texas Teacher Retirement System of Texas, Austin, recently received legislative approval to double the hedge fund limit to 10% of plan assets. Texas Teachers' hedge fund assets totaled $4.06 billion as of March 31.

The $51.2 billion Pennsylvania Public School Employees' Retirement
System, Harrisburg, also increased its hedge fund target to 12% of
plan assets from 10% in March; hedge fund assets totaled $4.92 billion
as of March 31.

For advice on direct investments, Texas
Teachers' investment staffers rely on specialist hedge fund consultant
Albourne Partners; Pennsylvania Schools officials use Aksia.

A chosen few

A
handful of sophisticated specialist consultants and a few general
consultants are winning most of the new assignments as well as retaining
existing clients or, increasingly, snatching clients away from each
other, according to a review of reported searches and hires in Pensions & Investments' archives.

The top specialist alternative investment consultants include:

• Albourne Partners, which advised 202 clients on $230 billion in hedge fund investments as of May 31.

• Aksia, which advised 42 clients with $42 billion as of April 30 in hedge fund investments.

• Cliffwater, which provided customized consulting services to 27 clients with $19 billion invested in hedge funds as of May 31.

The Beryl Consulting Group LLC also offers clients both basic research and highly customized portfolio services.

General investment consulting firms with a reputation for robust hedge fund expertise include Cambridge Associates LLC, NEPC LLC, Hewitt EnnisKnupp, Rocaton Investment Advisors LLC and Fund Evaluation Group LLC.

Specialist
hedge fund consultants are at “the leading edge of the phenomenon of
many pension plans, especially public plans, moving to direct hedge
fund investment,” said David Harmston, partner and global head of
Albourne Partners' client group. Mr. Harmston is based in the
London-based firm's Norwalk, Conn., office.

Each of the
specialist consultants offers different services and specializations
in combination, ranging from manager research and due diligence
reports to highly customized portfolio construction, including manager
selection as well as negotiation on fees and terms.

For
larger funds, like Texas Teachers, Albourne Partners' in-depth,
extensive research on hedge fund managers has served the fund well
since 2005.

During a June 16 board meeting discussion about
renewing the Albourne contract, Jerry Albright, deputy chief
investment officer, told trustees: “I can't imagine running this
portfolio without them. It would be devastating to lose Albourne.”

The
Pennsylvania Schools fund is one relying on a more collaborative
relationship with specialist consultants for hedge funds, private
equity and real estate.

“We view our
consultants as an extension of our investment staff,” said Alan Van
Noord, chief investment officer. “It's like a basketball team: Our
staffers are the starters, and the consultant is the sixth man,
getting a lot of playing time.”

With an additional 2.3% or about
$1.2 billion to put to work in new direct hedge fund investments
under the fund's new asset allocation, Mr. Van Noord said Aksia and
investment staff will gradually add new managers. The fund also is
considering adding emerging hedge fund managers.

Many large plans are moving fast into direct investments. According to FinAlternatives, Ohio Pension Eyes Hedge Funds For $1.2B Buy:

The
Ohio Public Employees Retirement is poised to make its first foray
into single-manager hedge funds a big one. The $76 billion pension
plans to invest about $1.2 billion in single and multi-strategy funds
in the third quarter, Pensions & Investments reports.

The
move follows OPERS’ investment of $700 million in funds of hedge
funds last year. The pension boosted its allocation to hedge funds to
3% last year, as well.

OPERS will
not issue requests for proposals; instead, the pension has asked
interested managers to contact the system directly. Those interested
managers should have at least $1 billion in assets under management.

Hedge
fund consultant Cliffwater will assist the pension in due diligence
and will recommend managers to OPERS. The first round of funds is
expected to be completed during the third quarter of the year.

I already shared my thoughts on public pensions betting the farm on hedge funds.
Is it better to use "specialist consultants" over funds of funds? That
really depends on the size and experience that pension funds have with
hedge funds. I know of very large hedge fund programs where they use
specialist consultants, fund of funds, and specialized capital
introduction people (if you are a US fund, contact me and I will be glad
to share some names with you of independent, qualified hedge fund
consultants with years of experience.)

I'm also toying with the
idea of "specialized consulting" on hedge funds and thinking of teaming
up with friends who are experts in operational due diligence,
performance, risk management, and ripping apart hedge fund strategies to
see who is truly delivering alpha and who is selling beta as alpha.
My biggest fear with this rush into hedge funds is that far too many
institutional investors will get bad advice, are not mindful of
conflicts of interest and will find refuge by investing in "brand names"
even if this isn't in their best interest. For example, I believe if
done properly, public pensions can benefit enormously by seeding hedge funds.

After my last post on betting the farm on hedge funds, I received this comment from a senior pension fund manager from a large US plan:

Hi,
Leo - thanks for posting the article. I wish you'd provided more
commentary, because there's a lot to be said about pension plans
investing more in hedge funds. (Then again, I know you've commented
extensively on the topic elsewhere.) A
key question: what is a 2-5% allocation to HFs really going to do for a
plan's overall risk/return profile? (We're at 2.5% and are always
having this discussion. As well we should. But I'm not sure others
are.)

He's absolutely right. Don't just
follow the pension herd into hedge funds. You can use specialist
consultants as an extension of your investment staff but at the end of
the day, they want you to invest in hedge funds because that's their
bread and butter. Very few will stop and have a critical discussion with
you as to how hedge funds fit into the overall portfolio and whether or
not you should be investing in hedge funds to begin with.

This
is where I will make my shameless plug. I have close friends in Montreal
with extensive experience covering all aspects of hedge funds.
Moreover, despite what people think, I'm not horny for hedge funds
and will give it to you straight on how you should invest in them
properly covering all risks, including operational and liquidity risks,
not just investment risks. Feel free to contact me at [e-mail]
and let me at least share some thoughts on how to conduct a proper due
diligence on hedge funds and fund of funds, explaining what you should
steer clear of even if "specialist consultants" are telling you
otherwise. Again, if done properly, hedge funds can add value to your
overall pension portfolio, but if done poorly, they will come back to
haunt you.

Comments

[oddjob]

Are pension managers so inept that they have to source out their own job?

[High Plains Drifter]

It looks like it is about time to sheer some more sheep.

[disabledvet]

the nature of the business is so brutally simple i find it odd that financial networks don't simply report on the "Simple Justice" (to quote a great book) of it all.  In the industry "you got a know when to hold 'em and know when to close 'em."  The size of these funds precludes any form of acceptable performance in this evironment.  The only good money managers are those who understand "i made it with this baby, it's time to shut down and if i've still got the game move on to the next thesis."  The greatest of them all folded up last fall--and all he did was finance Bowdoin college so perhaps "forewarned is forearmed."  it's as plain as day to me up here.  "Why should i have to worry about performance when i have so much money under management?  Now look at all those struggling little people!  Hardy, har, har!"  and thus Wall Street rises and falls again.  stick with your military commanders, your political leaders and you Constitution--they were built to have your back not the other guys.

[Yancey Ward]

These sort of moves are exactly the same as the debtor who resorts to roulette with his last money in order to "solve" his problems.  Desperate men will try anything when push comes to shove.

[snowball777]

We found we weren't losing pensioners money at quite the rate we thought was appropriate, but with the innovations these funds bring to the table, we'll be able to lose more, faster than ever before.

Can't wait to see all these pensions after their Magna-tard "investments" disappear into the vacuum created by the dark pools' collapse; mmmmm....that's good cat food.

[doomandbloom]

...aand its gone...

[Mercury]

Sorry to be a downer but this smells a lot like desperation, looming insolvency and a broken, government dominated market to me....sending out RFPs for unicorns and rainbows.

Long-term value investing is the only proven, widely duplicatable strategy which delivers reliable, long-term outperformance and you don't need a hedge fund structure/vehicle to implement that.

The requisite compliance red tape alone pretty much ensures that this project will mistake shit for shine in most cases anyway.

[pitz]

Amen.  Or just index the money and call it a day.  No need to pay exhorbiant compensation or massive administrative costs to anyone simply to invest the money into broad-based indicies. 

[Manthong]

http://www.youtube.com/watch?v=fsDpznl8eIs

[b_thunder]

$1.2B is just the beging.  of what?

$1.2B is  a) not enough to reverse the unfunded part of the liabilities, and b) more than enough to make both the hedge fund manager and the state bureaucrats who will "sign the check" filthy rich.  no question.  Also, watch out for campaign contributions to the Ohio Governor (of GOP and FOX news fame.)   There's $74.8B left in the state fund, and thousands for hedgies who will try to get a piece of it.

$1.2B is jsut the beginning of making millionaires into billionaires and destroying the future of retirees.