Institutional inflows into hedge funds/funds of funds have been strong over the past year as some institutions have come into the space for the first time while others increased their existing hedge fund allocations. Others have issued Requests for Proposals for managers, funds of funds or specialized hedge fund consultants.
Some institutional investors are looking to diversify their portfolios while others are taking advantage of perceived attractive beta and alpha opportunities as downside protection. Others are trying to boost their returns due to funding shortfalls.
Lois Peltz, president of Infovest21, observes that in the past year, several institutions made their first foray into hedge funds, such as Connecticut Retirement Plan & Trust Fund, El Paso County Retirement Plan, Kansas City Police Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Massachusetts Water Resources Authority Retirement System, New York City Police, New York City Employees’ Retirement, New York City Fire, San Jose Federated City Employees’ Retirement System, Vermont State Retirement System and West Palm Beach Firefighters’ Pension.
Other institutions have increased their allocations such as Alaska Retirement Management Board, City of Danbury, Metro Nashville, North Carolina Retirement System, Ohio State Employees’ Retirement System, Orange County Retirement System, Sacramento County Employees’ Retirement System, San Mateo County Employees’ Retirement Association.
A number of the largest pension allocators to hedge funds have increased their target allocation to hedge funds. For example, Texas City and District increased the cap from 15% to 20% while New Jersey State Investment Council increased it from 10% to 15%. Texas Teachers Retirement System upped the target from 5% to 10%. Illinois Teachers’ Retirement System increased the cap from 5% to 8%.
Many pensions have rebalanced their portfolios – firing some hedge funds/funds of funds while replacing them with others.
RFPs and searches are out (or expected soon) for Ohio School Employees’ Retirement System, Orange County Employees’ Retirement System, Seattle City Employees’ Retirement System, State-Boston Retirement System and State of Wisconsin.
Meanwhile, a few pensions have been redeeming allocations to hedge funds e.g. PennSERS, Delaware Public Employees Retirement System, or avoiding them altogether after a bad experience e.g.Ohio Bureau of Workers Compensation.
Some interesting trends in the past fiscal year include:
Strong overall portfolio returns in FY2011…Pension underfunding remains a factor motivating pensions to allocate to hedge funds
A strong stock market helped pension plans’ returns in FY2011. Returns in the 20%-23% range have been recorded by a number of systems including Alaska Permanent Fund, CalPERS, CalSTRS, Florida Retirement System, MassPRIM and New York City Pension Funds. In many cases, these are the strongest gains in 20+ years. However, 10-year returns are still below the required level. For example, CalPERS’ 10-year return is 5.36% while CalSTRS is 5.7%.1
Wilshire Associates says the annual return in the next 15 years will be 6.5%.2
Using government accounting standards, the aggregated underfunding for US state and local governments is about $1 trillion. But if using corporate accounting standards, the shortfall is about $2.5 trillion. A third approach, often used by economists who consider even the private accounting standards too lenient, yields a $3.5 trillion answer.3
The bill for retirement benefits is already straining budgets and is competing for resources with other critical needs such as education, infrastructure and health care.
To close the funding gap, some states have increased the retirement age and length of service requirements while others increased employee contribution requirements. Some systems lowered their discount rate assumptions. Some pensions are looking to hedge funds as a means to close the funding gap.
Momentum continues toward direct investing
Institutions are increasingly allocating directly to hedge funds rather than take the funds of funds route, especially if they have in-house capability to select hedge funds. Relatively poor fund of funds performance in 2008 and 2009, some funds of funds getting caught allocating to Madoff and other Ponzi schemes, the pressure for lower fees, institutions and their consultants acquiring more knowledge and expertise on hedge funds as well as some hedge funds becoming more institutional in nature have encouraged some institutions to invest directly with hedge funds.
Recent examples include Massachusetts Pension Reserves Investment Management’s pilot program to allocate assets directly with hedge funds. The pension plans to allocate to 20 hedge funds managers in the fourth quarter. Ohio Public Employees Retirement System, which initially used funds of funds, plans to invest $1.2 billion directly to hedge funds.
There is no standard approach for pensions which are direct allocators to hedge funds. Some use outsourced chief investment officers while others use consultants or fund of funds advisors to support their direct allocating efforts. 4
First time users tend to prefer funds of funds
Some pensions, mostly first time allocators, prefer funds of funds. Recent examples include Connecticut State Employees’ Retirement System, El Paso County Retirement Plan, Kansas City Police Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Massachusetts Water Resources Authority Employees’ Retirement System, Metro Nashville, New York City Pension Funds, North Carolina Retirement Funds, Orange County and Vermont State Retirement System.
Smaller pensions which lack resources to select or access direct hedge fund investments may continue to have funds of funds as their core investment. Some institutions continue with the core-satellite approach where the core allocation is to a fund of funds supplemented by a number of single strategy funds. Others seek more specialized funds of funds in place of, or in addition to, a diversified fund of funds mandate.
Hiring consultants for those pensions allocating directly to hedge funds
As more pensions consider investing directly with hedge funds, they are in need of a specialized hedge fund consultant. For example, the Maryland State Retirement Agency issued a Request for Information seeking a consulting firm to advise the staff on its absolute return portfolio.
MassPRIM hired Cliffwater in April 2011 as its hedge fund consultant while Texas Employees Retirement System hired Albourne. CalSTRS hired Lyxor Asset Management as a consultant for its global macro hedge fund portfolio.
Fee reductions
Pensions have also been keeping a strict eye on fees – one reason that a number are taking the direct hedge fund route over funds of funds. For instance, New Jersey negotiated a $40 million fee savings in alternative investment fees. Texas County & District Retirement System and CalPERS also were among those pensions taking steps to limit fees.
Growth potential with corporate plans
Whereas public pension funds comprise a larger number investing in hedge funds, the largest growth potential is with private corporate plans. The private sector started investing later than public pensions and endowments. Recent activity shows select corporate pensions are starting to make large allocations to hedge funds.
Japan corporate pension funds are now more closely examining hedge funds. Surveys indicate that typically 2-5% of the corporate pension goes to hedge funds but that percentage could increase to 10-15% over the next two years.
European pension interest in hedge funds is strong
European-based pensions have the greatest appetite for new commitments. One survey found that 45% are seeking new opportunities.
Smaller endowments looking closer at hedge funds/funds of funds
On the endowment front, some smaller endowments e.g. Wilfrid Laurier University, are starting to look at and invest in hedge funds. Previously, large endowments had generally been the sole users of hedge funds/funds of funds.
Some endowments seed
Meanwhile, some of the larger endowments who have been allocating to hedge funds for a while are seeding hedge fund managers e.g. University of London seeded a Calamos fund.
Sovereign Wealth Funds’ allocations to hedge funds stay flat
Surveys indicate that SWFs’ allocations to hedge funds are about 36% of their portfolio – about the same as last year.
Infovest21's annual white paper examines trends on a global basis. The white paper looks at recent (June 1, 2010 to June 30, 2011) hedge fund interest and activity by pensions, endowments, sovereign wealth funds. Summary highlights of recent activity as well as plans for moving ahead are provided for a sampling of institutions.
Institutional activity is examined in North America, Europe, UK and Japan. Special emphasis is placed on the largest allocators i.e. those allocating $1 billion or more to hedge funds. The white paper also provides a survey of smaller institutions making allocations as well as those issuing RFPs or conducting searches. Those institutions deciding not to allocate or who have reduced their hedge fund allocation are also listed.
Showing posts with label institutions. Show all posts
Showing posts with label institutions. Show all posts
Sunday, August 28, 2011
Tuesday, June 28, 2011
Infovest21 Survey: 60% of institutions surveyed see hedge funds as a possible solution to underfunding problems
In its just-released institutional investor survey, Infovest21 found that almost 60% of the respondents say hedge funds are a possible solution for their underfunding problem.
Lois Peltz, president of Infovest21, noted, “Institutional investors are primarily looking to hedge funds for non-correlated returns. Potential for higher returns, diversification, and downside protection were cited to a lesser extent.”
Other findings of the survey are:
Hedge funds are a mainstream investment
The average institution allocated 29.2% to hedge funds while funds of funds are allocated 11.4%. This represents a 2.3% increase for hedge funds but no change for funds of funds compared with 2009 levels.
Over the next 12 months, the institutions expect their allocations to increase to 35.5% for hedge funds and 16.2% for funds of funds.
Almost one-half of the respondents have been allocating to hedge funds for over ten years.
Over 40% of the respondents said they are using equities to fund hedge funds. Fixed income and cash were each cited by almost 30%.
Allocate most often to long/short equity and multi-strategy….more considerations being given to managed futures and distressed
Of the 23 strategies asked about, institutional investors allocated most frequently to equity long/short and multi-strategy. Respondents, however, had mixed views on multi-strategy funds with almost 40% saying their view was dependent on the asset allocator.
Country specific funds, activists, asset based lending and mortgage-backed securities are out-of-favor while managed futures and distressed are being considered for the first time by a large number of institutional investors.
Consultant’s specialty expertise
In selecting a consultant, almost two-thirds of the respondents said the primary selection factor was specialty expertise followed closely by experience.
Fraud remains major concern
Institutions’ largest concerns with hedge funds are fraud and then poor performance.
Fee pressure to continue
Downward pressure is likely to continue on hedge fund fee structures as almost 40% of the institutions said the management fee is too high while 30% said the incentive fee was too high.
Competitive products
If the institutional investor decided not to use hedge funds going forward, they would replace them most often with private equity. In descending order, hedge fund replication products, commodities, real estate and hedge fund indices were also cited.
Contact Infovest21 for the full survey results, general@infovest21.com or call 212-686-6440
Lois Peltz, president of Infovest21, noted, “Institutional investors are primarily looking to hedge funds for non-correlated returns. Potential for higher returns, diversification, and downside protection were cited to a lesser extent.”
Other findings of the survey are:
Hedge funds are a mainstream investment
The average institution allocated 29.2% to hedge funds while funds of funds are allocated 11.4%. This represents a 2.3% increase for hedge funds but no change for funds of funds compared with 2009 levels.
Over the next 12 months, the institutions expect their allocations to increase to 35.5% for hedge funds and 16.2% for funds of funds.
Almost one-half of the respondents have been allocating to hedge funds for over ten years.
Over 40% of the respondents said they are using equities to fund hedge funds. Fixed income and cash were each cited by almost 30%.
Allocate most often to long/short equity and multi-strategy….more considerations being given to managed futures and distressed
Of the 23 strategies asked about, institutional investors allocated most frequently to equity long/short and multi-strategy. Respondents, however, had mixed views on multi-strategy funds with almost 40% saying their view was dependent on the asset allocator.
Country specific funds, activists, asset based lending and mortgage-backed securities are out-of-favor while managed futures and distressed are being considered for the first time by a large number of institutional investors.
Consultant’s specialty expertise
In selecting a consultant, almost two-thirds of the respondents said the primary selection factor was specialty expertise followed closely by experience.
Fraud remains major concern
Institutions’ largest concerns with hedge funds are fraud and then poor performance.
Fee pressure to continue
Downward pressure is likely to continue on hedge fund fee structures as almost 40% of the institutions said the management fee is too high while 30% said the incentive fee was too high.
Competitive products
If the institutional investor decided not to use hedge funds going forward, they would replace them most often with private equity. In descending order, hedge fund replication products, commodities, real estate and hedge fund indices were also cited.
Contact Infovest21 for the full survey results, general@infovest21.com or call 212-686-6440
Sunday, March 27, 2011
Infovest21 White Paper: Institutions search for structural efficiency....funds of funds take a more solutions-based approach
Three major trends continue to impact the hedge fund/funds of funds community - institutionalization, regulation and a challenging asset raising environment.
Infovest21's just-released annual white paper on trends and outlook, looks at each of these trends in detail.
Institutionalization
Pension underfunding, a major concern worldwide, is leading to increased institutional interest in hedge funds/funds of funds as a possible solution in pensions' search for alpha.
More institutions are becoming comfortable thinking about sources of alpha as opposed to traditional buckets. For example, long/short equity is now becoming part of the equity traditional allocation. Instead of a 5% allocation to alternatives now, 20-30% of traditional equity allocation may be put into long/short equities.
Pension plans are increasingly using hedge fund allocations for both fixed income and equity replacements whereas in the past, hedge funds were usually used as absolute return.
Another related trend is the search for structural efficiency. To achieve this, some pensions are allocating directly to hedge funds, accessing fund managers at a reduced fee and/or combining replication strategies. Other institutional investors are combining long-only managers with hedge fund managers as long-only managers generally can generate alpha at a lower fee level.
Regulation and its implications
A number of regulations are affecting the hedge fund community and having numerous repercussions. For example:
A number of compliance experts expect to see more enforcement actions against advisers for a full host of issues but particularly insider trading. The SEC is becoming more educated to what the risks are, how managers manage their book of business and what some of the conflicts are.
As a result, hedge funds are taking a closer look at their insider trading policies. They are putting together compliance policies on expert networks which they hadn't done before. Lawyers advise managers to have documentation showing what caused them to trade in a particular stock.
The SEC is currently investigating hedge funds, and other financial institutions' dealings with sovereign wealth funds. The SEC is scrutinizing these transactions to see if Foreign Corrupt Practice Act violations have occurred i.e. whether improper practices have been used to influence investment decisions outside the US. There haven't been any cases yet on this but the issue is expected to increase in importance.
In July, US hedge fund managers with more than $150 million in assets will have to register with the SEC. The increased cost of registration and the cost to implement compliance programs will significantly affect smaller hedge funds which are already particularly vulnerable, especially if they are not yet above their high water mark.
Due to the Volcker rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act, proprietary traders continue to spin out of investment banks. The result is more hedge fund launches or talented traders joining hedge funds.
Improved but challenging asset raising environment
While improving, asset raising remains challenging and more difficult than most managers expected. While launches are increasing from the past few years' doldrums, new launches tend to be relatively small in size.
Consequently, seeders are in big demand which has resulted in more seeding platforms being set up and more specialization occurring. Institutions are starting to show more interest in emerging managers and seeding funds.
Momentum is growing in Asia as investors and seeders search for new managers and higher rates of return.
Inflows generally are going toward high transparency, liquid products such as managed accounts/funds of one and Ucits. Retail products such as mutual funds using hedge fund strategies are gaining in popularity.
The asset raising environment is also impacting the evolution of funds of funds. The medium-to-larger sized funds of funds increasingly find themselves competing against consultants, wealth managers, multi-strategy funds and specialist consultants. Some funds of funds are developing advisory businesses.Some are also moving into the subadvisory business as some pensions are looking for a fund of funds that can facilitate knowledge transfer so they may ultimately become more active in the internal management of its hedge fund program.
The above are excerpts fromInfovest21's white paper: Major Trends Occurring in 2011 - Implications for Hedge Funds/Funds of Funds.
Infovest21's just-released annual white paper on trends and outlook, looks at each of these trends in detail.
Institutionalization
Pension underfunding, a major concern worldwide, is leading to increased institutional interest in hedge funds/funds of funds as a possible solution in pensions' search for alpha.
More institutions are becoming comfortable thinking about sources of alpha as opposed to traditional buckets. For example, long/short equity is now becoming part of the equity traditional allocation. Instead of a 5% allocation to alternatives now, 20-30% of traditional equity allocation may be put into long/short equities.
Pension plans are increasingly using hedge fund allocations for both fixed income and equity replacements whereas in the past, hedge funds were usually used as absolute return.
Another related trend is the search for structural efficiency. To achieve this, some pensions are allocating directly to hedge funds, accessing fund managers at a reduced fee and/or combining replication strategies. Other institutional investors are combining long-only managers with hedge fund managers as long-only managers generally can generate alpha at a lower fee level.
Regulation and its implications
A number of regulations are affecting the hedge fund community and having numerous repercussions. For example:
As a result, hedge funds are taking a closer look at their insider trading policies. They are putting together compliance policies on expert networks which they hadn't done before. Lawyers advise managers to have documentation showing what caused them to trade in a particular stock.
Improved but challenging asset raising environment
While improving, asset raising remains challenging and more difficult than most managers expected. While launches are increasing from the past few years' doldrums, new launches tend to be relatively small in size.
Consequently, seeders are in big demand which has resulted in more seeding platforms being set up and more specialization occurring. Institutions are starting to show more interest in emerging managers and seeding funds.
Momentum is growing in Asia as investors and seeders search for new managers and higher rates of return.
Inflows generally are going toward high transparency, liquid products such as managed accounts/funds of one and Ucits. Retail products such as mutual funds using hedge fund strategies are gaining in popularity.
The asset raising environment is also impacting the evolution of funds of funds. The medium-to-larger sized funds of funds increasingly find themselves competing against consultants, wealth managers, multi-strategy funds and specialist consultants. Some funds of funds are developing advisory businesses.Some are also moving into the subadvisory business as some pensions are looking for a fund of funds that can facilitate knowledge transfer so they may ultimately become more active in the internal management of its hedge fund program.
The above are excerpts fromInfovest21's white paper: Major Trends Occurring in 2011 - Implications for Hedge Funds/Funds of Funds.
Tuesday, August 17, 2010
Infovest21 White Paper: Institutional Investors Enter Next Phase in Hedge Fund Investing
Institutions want the highest and most timely disclosure of information from hedge funds as seen by their move toward customized vehicles and managed accounts.
They have raised the bar in areas such as liquidity and transparency. Institutions generally want greater liquidity from their hedge fund managers i.e. funds with shorter lock-up periods. They generally prefer conservative strategies and reduced leverage. As a result, they are searching for hedge funds which can produce lower annualized returns than requested before e.g. 6-7%.
Institutional investors are increasingly differentiating alternative investments by liquidity and risk.
Rather than separating hedge funds out as a separate asset class, some industry experts expect pension funds to use hedge fund managers within their existing equity and fixed income buckets as a best-of-breed solution.
They want fees based on long term rather than short term performance.
Fall-out from 2008 financial crisis
The global financial crisis of 2008 resulted in some institutions putting their hedge fund allocation plans on hold while others re-evaluated their portfolios and asset allocation. Pension & Investments estimated institutional inflows into hedge funds in 2009 were $21.51 billion, down 49% from 2008 and down 68% from 2007. It was not until the fourth quarter of 2009 that inflows started and were estimated at $12.4 billion.
Hedge Fund Asset Flows P&I
($B)
Q1 2009 3.8
Q2 2009 4.5
Q3 2009 0.8
Q4 2009 12.4
Source: Pensions & Investments
Despite disappointing hedge fund performance in 2008, the Madoff Ponzi scheme and other scandals, gates and related illiquidity issues, institutional investors continue to find hedge funds attractive – realizing they performed better than most other investments during 2008.
According to Russell Global Survey, the average institutional allocation to hedge funds was 4.2% in 2009 and is expected to increase to 5.7% by 2012.
Recent activity
In the past year, several institutions made their first foray into hedge funds, such as California State Teachers Retirement, Denver Employees Retirement Fund, Florida State Board of Administration, Kentucky Retirement System, State of Wisconsin Investment Board, Employees’ Retirement System of Texas and Vermont Pensions. In Europe, Ireland’s National Pension Reserve is on brink of making its first allocation.
Other institutions have increased their allocations such as Arizona Public Safety, Chicago Teachers Pension Fund, Illinois Teachers Retirement, Iowa Public Employees, Kern County Employees Retirement, New Hampshire Retirement, New York State Common Retirement Fund, Ohio School Employees Retirement System and West Virginia Investment Board. In Europe and UK, British Telecom, APK, ATP, Clywyd Pension Fund, UK Universities Superannuation Scheme and West Midlands are among those increasing hedge fund allocations.
RFPs and searches are out (or expected soon) for Chicago Policemen’s Annuity & Benefit Fund, Connecticut Investment Council, Los Angeles Police & Fire, Ohio Public Employees Retirement System, San Antonio Fire & Police, San Bernardino County, Santa Barbara County, and Texas Permanent School Fund. In Europe, searches are on for AP1, Fife Council, Lincolnshire Pension and Waltham Forest.
Some institutions, despite filing lawsuits in connection with hedge funds e.g. Amaranth’s collapse, Madoff-related cases or WG-related cases, continue to allocate to hedge funds. Two examples are Iowa Public Employees Retirement System and San Diego County Employees Retirement Association.
Momentum grows toward direct investing
Another trend is institutions allocating directly to hedge funds rather than take the funds of funds route. Relatively poor fund of funds performance in 2008 and 2009, Madoff and other Ponzi schemes, the pressure for lower fees, institutions and their consultants acquiring more knowledge and expertise on hedge funds as well as some hedge funds becoming more institutional in nature have encouraged some institutions to invest directly with hedge funds. Recent examples include Boeing, South Carolina Retirement System and Pensioenfonds Zorg en Welzijn.
Yet some pensions are searching for funds of funds e.g. Ohio Public Employment Retirement System, Croyden and Lincolnshire Pension. Some institutions continue with the core-satellite approach where the core allocation is to a fund of funds supplemented by a number of single strategy funds.
Growth potential
Whereas public pension funds comprise a larger number investing in hedge funds, the largest growth potential is with private corporate plans. The private sector started investing later than public pensions and endowments. Recent activity shows select corporate pensions are starting to make large allocations to hedge funds.
In the endowment space, growth is limited with the larger endowments as they were early and heavy adopters of hedge funds. The main opportunity is a new manager replacing an existing manager or with smaller endowments increasing their allocations. Following the 2008 financial crisis, endowments are no longer copying the Harvard and Yale models but reassessing what is best for their specific needs.
Outside the US
It appears that European institutions have terminated or reduced hedge fund allocations more than their US counterparts. Lack of diversification, lack of transparency during the financial crisis as well as poor performance during 2008 are often-cited reasons. Some institutions in this category are Unipension (Denmark), VER (Finland), Ilmarinen Mutual Insurance (Finland), TNO (The Netherlands), Nedlloyd Pension (The Netherlands), AP2 (Sweden), BLVK (Switzerland), Luzern Pension (Switzerland) and Tate Gallery (UK).
Nevertheless, European pension plans as a whole are still looking to increase their exposure to hedge funds/funds of funds. According to an IPE survey, the average European institution has about 2.3% of its portfolio in hedge funds. Swiss pensions have the highest average allocation at about 6%. While most European institutions have increased their allocations, Italy was the exception and almost halved it.
Japanese pension funds have become more cautious of hedge funds. Estimates are that hedge funds account for 7-9% of Japanese pensions; a 2% reduction occurred in the past year. Hedge funds’ role seems to be changing from a fixed income substitute to a middle-risk type asset. Japanese pension fund preference is for low risk and transparent products.
Other trends
Other interesting trends include more focus on due diligence. While the weighting of the various attributes varies among investors, focus is increased on operational due diligence and risk management policies, notes Don Steinbrugge of Agecroft Partners.
Lois Peltz Lois Peltz, president of Infovest21, observes, “Some institutions are taking a more active role in seeding hedge fund managers because they hope the best hedge fund managers will spin out as bigger independent firms. The rationale is that by getting involved early on with a hedge fund manager, the institutional investor has more control over its assets and can better control its investment cost. It creates the possibility of locking in and aligning interests early on with top teams without paying high compensation costs.”
The above information is an excerpt from Infovest21’s just-released Institutional Interest/Allocation in Hedge Funds, an annual white paper examining trends on a global basis. The white paper looks at recent hedge fund interest and activity by pensions, endowments, sovereign wealth funds. Commentary is also provided on consultants, corporate pensions and insurance companies. For each institution, summary highlights of recent activity are provided as well as plans for moving ahead.
Institutional activity is examined in North America, Europe, UK, Japan and Australia. Special emphasis is place on the largest allocators i.e. those allocating $1 billion or more to hedge funds, as well as the next tier i.e. those allocating between $500 million and $999 million. A survey is also provided of smaller institutions making allocations as well as those issuing RFPs or conducting a search. Those institutions deciding not to allocate or who have reduced their hedge fund allocation are also listed.
They have raised the bar in areas such as liquidity and transparency. Institutions generally want greater liquidity from their hedge fund managers i.e. funds with shorter lock-up periods. They generally prefer conservative strategies and reduced leverage. As a result, they are searching for hedge funds which can produce lower annualized returns than requested before e.g. 6-7%.
Institutional investors are increasingly differentiating alternative investments by liquidity and risk.
Rather than separating hedge funds out as a separate asset class, some industry experts expect pension funds to use hedge fund managers within their existing equity and fixed income buckets as a best-of-breed solution.
They want fees based on long term rather than short term performance.
Fall-out from 2008 financial crisis
The global financial crisis of 2008 resulted in some institutions putting their hedge fund allocation plans on hold while others re-evaluated their portfolios and asset allocation. Pension & Investments estimated institutional inflows into hedge funds in 2009 were $21.51 billion, down 49% from 2008 and down 68% from 2007. It was not until the fourth quarter of 2009 that inflows started and were estimated at $12.4 billion.
Hedge Fund Asset Flows P&I
($B)
Q1 2009 3.8
Q2 2009 4.5
Q3 2009 0.8
Q4 2009 12.4
Source: Pensions & Investments
Despite disappointing hedge fund performance in 2008, the Madoff Ponzi scheme and other scandals, gates and related illiquidity issues, institutional investors continue to find hedge funds attractive – realizing they performed better than most other investments during 2008.
According to Russell Global Survey, the average institutional allocation to hedge funds was 4.2% in 2009 and is expected to increase to 5.7% by 2012.
Recent activity
In the past year, several institutions made their first foray into hedge funds, such as California State Teachers Retirement, Denver Employees Retirement Fund, Florida State Board of Administration, Kentucky Retirement System, State of Wisconsin Investment Board, Employees’ Retirement System of Texas and Vermont Pensions. In Europe, Ireland’s National Pension Reserve is on brink of making its first allocation.
Other institutions have increased their allocations such as Arizona Public Safety, Chicago Teachers Pension Fund, Illinois Teachers Retirement, Iowa Public Employees, Kern County Employees Retirement, New Hampshire Retirement, New York State Common Retirement Fund, Ohio School Employees Retirement System and West Virginia Investment Board. In Europe and UK, British Telecom, APK, ATP, Clywyd Pension Fund, UK Universities Superannuation Scheme and West Midlands are among those increasing hedge fund allocations.
RFPs and searches are out (or expected soon) for Chicago Policemen’s Annuity & Benefit Fund, Connecticut Investment Council, Los Angeles Police & Fire, Ohio Public Employees Retirement System, San Antonio Fire & Police, San Bernardino County, Santa Barbara County, and Texas Permanent School Fund. In Europe, searches are on for AP1, Fife Council, Lincolnshire Pension and Waltham Forest.
Some institutions, despite filing lawsuits in connection with hedge funds e.g. Amaranth’s collapse, Madoff-related cases or WG-related cases, continue to allocate to hedge funds. Two examples are Iowa Public Employees Retirement System and San Diego County Employees Retirement Association.
Momentum grows toward direct investing
Another trend is institutions allocating directly to hedge funds rather than take the funds of funds route. Relatively poor fund of funds performance in 2008 and 2009, Madoff and other Ponzi schemes, the pressure for lower fees, institutions and their consultants acquiring more knowledge and expertise on hedge funds as well as some hedge funds becoming more institutional in nature have encouraged some institutions to invest directly with hedge funds. Recent examples include Boeing, South Carolina Retirement System and Pensioenfonds Zorg en Welzijn.
Yet some pensions are searching for funds of funds e.g. Ohio Public Employment Retirement System, Croyden and Lincolnshire Pension. Some institutions continue with the core-satellite approach where the core allocation is to a fund of funds supplemented by a number of single strategy funds.
Growth potential
Whereas public pension funds comprise a larger number investing in hedge funds, the largest growth potential is with private corporate plans. The private sector started investing later than public pensions and endowments. Recent activity shows select corporate pensions are starting to make large allocations to hedge funds.
In the endowment space, growth is limited with the larger endowments as they were early and heavy adopters of hedge funds. The main opportunity is a new manager replacing an existing manager or with smaller endowments increasing their allocations. Following the 2008 financial crisis, endowments are no longer copying the Harvard and Yale models but reassessing what is best for their specific needs.
Outside the US
It appears that European institutions have terminated or reduced hedge fund allocations more than their US counterparts. Lack of diversification, lack of transparency during the financial crisis as well as poor performance during 2008 are often-cited reasons. Some institutions in this category are Unipension (Denmark), VER (Finland), Ilmarinen Mutual Insurance (Finland), TNO (The Netherlands), Nedlloyd Pension (The Netherlands), AP2 (Sweden), BLVK (Switzerland), Luzern Pension (Switzerland) and Tate Gallery (UK).
Nevertheless, European pension plans as a whole are still looking to increase their exposure to hedge funds/funds of funds. According to an IPE survey, the average European institution has about 2.3% of its portfolio in hedge funds. Swiss pensions have the highest average allocation at about 6%. While most European institutions have increased their allocations, Italy was the exception and almost halved it.
Japanese pension funds have become more cautious of hedge funds. Estimates are that hedge funds account for 7-9% of Japanese pensions; a 2% reduction occurred in the past year. Hedge funds’ role seems to be changing from a fixed income substitute to a middle-risk type asset. Japanese pension fund preference is for low risk and transparent products.
Other trends
Other interesting trends include more focus on due diligence. While the weighting of the various attributes varies among investors, focus is increased on operational due diligence and risk management policies, notes Don Steinbrugge of Agecroft Partners.
Lois Peltz Lois Peltz, president of Infovest21, observes, “Some institutions are taking a more active role in seeding hedge fund managers because they hope the best hedge fund managers will spin out as bigger independent firms. The rationale is that by getting involved early on with a hedge fund manager, the institutional investor has more control over its assets and can better control its investment cost. It creates the possibility of locking in and aligning interests early on with top teams without paying high compensation costs.”
The above information is an excerpt from Infovest21’s just-released Institutional Interest/Allocation in Hedge Funds, an annual white paper examining trends on a global basis. The white paper looks at recent hedge fund interest and activity by pensions, endowments, sovereign wealth funds. Commentary is also provided on consultants, corporate pensions and insurance companies. For each institution, summary highlights of recent activity are provided as well as plans for moving ahead.
Institutional activity is examined in North America, Europe, UK, Japan and Australia. Special emphasis is place on the largest allocators i.e. those allocating $1 billion or more to hedge funds, as well as the next tier i.e. those allocating between $500 million and $999 million. A survey is also provided of smaller institutions making allocations as well as those issuing RFPs or conducting a search. Those institutions deciding not to allocate or who have reduced their hedge fund allocation are also listed.
Thursday, April 8, 2010
Infovest21 Investor Focus:Endowments reassess portfolio construction and objectives
Tom Heck, treasurer of Ball State University, says all institutions, having gone through the past couple of years, are reassessing what portfolio construction will achieve their objective. “Up to a year ago, we were in different stages of following the Yale or Harvard model. Now we all are stepping back and assessing how much volatility we can tolerate in our spending and how that translates back to how much volatility we can tolerate in the portfolio. At the same time, how do we achieve the portfolio return required to achieve our long-term objective?”
Part of the answer is based on their assumptions about each asset class and the managers they can access. Heck points out that Yale can access very top-flight managers in any class which gives them a very different risk/return profile than the average endowment.
Heck says the trick in this environment is how to solve simultaneously multiple equations i.e. the return, risk, and governance equations for a successful portfolio.
Average endowment lost 18.7% in FY 2009
The average endowment lost 18.7% for the year ending June 30, 2009, according to a joint National Association of College And University Business Officers-Commonfund Institute report. The study was based on 842 US endowments, representing $306 billion in assets.
The surveyed endowments allocated 51% to alternatives, 18% to domestic equities, 14% to international equities, 13% to fixed income and 4% to short-term securities/cash/other.
Performance-wise, alternatives lost 17.8%. International equities dropped 27.6% while domestic equities retreated 25.5%. Fixed income returned 3% while short term securities/cash inched up 0.8% - the only two categories with positive results.
Smaller endowments outperformed larger ones for the first time in several years, largely due to their reliance on fixed income investments. The smallest endowments – those with less than $25 million – lost 16.8% in the last fiscal year. They had, on average, 13% in alternatives compared with 9% in 2008.
Those endowments with more than $1 billion had about 61% in alternatives. Of that amount, 40% was in hedge funds, 22% in private equity, 13% in private real estate, 12% in energy and natural resources, 8% in venture capital and 5% in distressed debt funds. The largest endowments lost 20.5% for the year.
Harvard, which lost 29.8%, had the largest drop among the 53 endowments with more than $1 billion. Yale followed closely with a 28.6% setback, resulting in its assets dropping to $16.3 billion.
Sampling of Select Endowment Returns FY 2009 (%)
Harvard -29.8
Yale -28.6
Stanford -26.0
George Washington Univ -21.2
Wellesley -17.0
Virginia Tech -14.0
Endowment Assets under management ($B)
Harvard 26.0
Yale 16.3
Stanford 12.6
George Washington Univ 0.9
Wellesley 1.3
Virginia Tech 0.5
Role in the operating budget
On average, the endowments spent 4.4% of their endowments on operating costs, up slightly from the prior year which was 4.3%. About 43% of the endowments said spending was up while 25% said it decreased and 28% cited no change.
Jonathan Hook, chief investment officer of Ohio State University, observes that people got caught on how much their university relied on the endowment performance. “Each school was a little bit different – some relied on their endowment for a lot of their operating budget and some relied a little. A lot of schools did not take that into account when they planned their asset allocation.”
Hook says their returns were not what they would have liked, but because the university was not reliant on the endowment for a large percentage of their operating budget, it was easier to work through.
Heck points out: “The Yale endowment is responsible for a significant portion of the university’s operating budget, where we at Ball State are not. When you are funding an operating budget, then you are dealing with a constraint in the volatility of spending, and your investments. We are a public institution, and our endowments fund scholarships, lectureships, and other university programs which enhance the university but do not “turn on the lights in the morning.” Our tolerance for volatility and spending is different from what theirs is, and would probably be reflected in a different portfolio construction.”
This situation has led endowments to think more holistically about coordinating their Treasurer/CFO office and endowment office, and how everything works in concert with each other, says Hook.
He believes a higher percentage in alternatives will generate better performance. A one-year time period is not an appropriate barometer in which to measure performance. “Hedge funds held up better than many other asset classes,” he said.
Just released issue of Infovest21Investor Focus: Endowments reassess portfolio construction and objectives
Interviews with Tom Heck, Ball State University and Jonathan Hook, Ohio State University
Quarterly Sentiment Survey: Managers
Updates: Yale University, University of Sydney, University of Toronto Asset Mgt
TUCS vs Nacubo
Book Review: Michael Lewis’ The Big Short
Part of the answer is based on their assumptions about each asset class and the managers they can access. Heck points out that Yale can access very top-flight managers in any class which gives them a very different risk/return profile than the average endowment.
Heck says the trick in this environment is how to solve simultaneously multiple equations i.e. the return, risk, and governance equations for a successful portfolio.
Average endowment lost 18.7% in FY 2009
The average endowment lost 18.7% for the year ending June 30, 2009, according to a joint National Association of College And University Business Officers-Commonfund Institute report. The study was based on 842 US endowments, representing $306 billion in assets.
The surveyed endowments allocated 51% to alternatives, 18% to domestic equities, 14% to international equities, 13% to fixed income and 4% to short-term securities/cash/other.
Performance-wise, alternatives lost 17.8%. International equities dropped 27.6% while domestic equities retreated 25.5%. Fixed income returned 3% while short term securities/cash inched up 0.8% - the only two categories with positive results.
Smaller endowments outperformed larger ones for the first time in several years, largely due to their reliance on fixed income investments. The smallest endowments – those with less than $25 million – lost 16.8% in the last fiscal year. They had, on average, 13% in alternatives compared with 9% in 2008.
Those endowments with more than $1 billion had about 61% in alternatives. Of that amount, 40% was in hedge funds, 22% in private equity, 13% in private real estate, 12% in energy and natural resources, 8% in venture capital and 5% in distressed debt funds. The largest endowments lost 20.5% for the year.
Harvard, which lost 29.8%, had the largest drop among the 53 endowments with more than $1 billion. Yale followed closely with a 28.6% setback, resulting in its assets dropping to $16.3 billion.
Sampling of Select Endowment Returns FY 2009 (%)
Harvard -29.8
Yale -28.6
Stanford -26.0
George Washington Univ -21.2
Wellesley -17.0
Virginia Tech -14.0
Endowment Assets under management ($B)
Harvard 26.0
Yale 16.3
Stanford 12.6
George Washington Univ 0.9
Wellesley 1.3
Virginia Tech 0.5
Role in the operating budget
On average, the endowments spent 4.4% of their endowments on operating costs, up slightly from the prior year which was 4.3%. About 43% of the endowments said spending was up while 25% said it decreased and 28% cited no change.
Jonathan Hook, chief investment officer of Ohio State University, observes that people got caught on how much their university relied on the endowment performance. “Each school was a little bit different – some relied on their endowment for a lot of their operating budget and some relied a little. A lot of schools did not take that into account when they planned their asset allocation.”
Hook says their returns were not what they would have liked, but because the university was not reliant on the endowment for a large percentage of their operating budget, it was easier to work through.
Heck points out: “The Yale endowment is responsible for a significant portion of the university’s operating budget, where we at Ball State are not. When you are funding an operating budget, then you are dealing with a constraint in the volatility of spending, and your investments. We are a public institution, and our endowments fund scholarships, lectureships, and other university programs which enhance the university but do not “turn on the lights in the morning.” Our tolerance for volatility and spending is different from what theirs is, and would probably be reflected in a different portfolio construction.”
This situation has led endowments to think more holistically about coordinating their Treasurer/CFO office and endowment office, and how everything works in concert with each other, says Hook.
He believes a higher percentage in alternatives will generate better performance. A one-year time period is not an appropriate barometer in which to measure performance. “Hedge funds held up better than many other asset classes,” he said.
Just released issue of Infovest21Investor Focus: Endowments reassess portfolio construction and objectives
Interviews with Tom Heck, Ball State University and Jonathan Hook, Ohio State University
Quarterly Sentiment Survey: Managers
Updates: Yale University, University of Sydney, University of Toronto Asset Mgt
TUCS vs Nacubo
Book Review: Michael Lewis’ The Big Short
Tuesday, September 15, 2009
Infovest21\'s Discussion Blog
Welcome to Infovest21's discussion blog. The blog may highlight some items from Infovest21’s top news stories, informal/unconfirmed reports not included in the news service, quick polls, photos as well as links to other interesting sites and mention of upcoming events.
We look forward to hearing your comments and observations about hedge fund/fund of fund developments and trends. We hope to address pressing issues facing both investors and managers in the hedge fund space.
Highlights from the day's news:
Institutional results continue to be released. CalPERS reports that hedge funds were flat in Q2 and down 15.3% for the year. For a table of the largest pension allocators to hedge funds, click here
Regulatory initiatives are coming from all fronts. IOSCO just published its best practices for funds of funds.
For managers and funds of funds interested in this topic, a Regulatory Update seminar is taking place in New York City on
September 21.
Lawsuits related to the Madoff Ponzi scheme don’t stop. A class action law suit was filed against Agile Group in Colorado court.
The consolidation trend is alive and well globally. The latest example is Vision Investment Management taking a stake in Harmony Capital.
We’re hearing…
We’re hearing some interesting high water mark variations. Do you have interesting ones to share?
One anonymous source says at least one large established manager is contemplating honoring high water marks that were established at other manager’s funds. If an investor comes to this large manager from a fund that has blown out, the manager says until we recover your loss carry forward (from the former manager), we won’t take an incentive fee. “These large managers believe a phenomenal opportunity exists to pick up some assets by offering that sort of discount to other investors who have experienced pain,” said the unnamed source.
Let us know what you’re hearing and thinking…contact us at general@infovest21.com
Check out our upcoming seminars
We look forward to hearing your comments and observations about hedge fund/fund of fund developments and trends. We hope to address pressing issues facing both investors and managers in the hedge fund space.
Highlights from the day's news:
For managers and funds of funds interested in this topic, a Regulatory Update seminar is taking place in New York City on
September 21.
We’re hearing…
We’re hearing some interesting high water mark variations. Do you have interesting ones to share?
One anonymous source says at least one large established manager is contemplating honoring high water marks that were established at other manager’s funds. If an investor comes to this large manager from a fund that has blown out, the manager says until we recover your loss carry forward (from the former manager), we won’t take an incentive fee. “These large managers believe a phenomenal opportunity exists to pick up some assets by offering that sort of discount to other investors who have experienced pain,” said the unnamed source.
Let us know what you’re hearing and thinking…contact us at general@infovest21.com
Check out our upcoming seminars
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