By Susan Barreto
The end goal is alpha, independence and investment returns for
full funding of pensions, university projects and grants. For a
growing number of pension funds this means using existing fund
of hedge fund (FoHF) managers to create dynamic portfolios that
will have to stand the test of time and ultimately end their
relationship with funds of funds.
These FoHF 'ghost’ portfolios are being built
by firms such as Grosvenor, GAM and K2. Essentially, knowing
that a client is no longer interested in a commingled fund,
they help to choose the direct managers to keep in the
portfolio, leaving behind a spectre of their expertise. Smaller
public pension funds, such as Colorado Fire and Police and
Oklahoma Police Pension, are moving into single-manager names
and demolishing the traditional role of FoHFs as an easy
one-stop entry point into hedge funds.
Institutions building direct hedge fund portfolios are
effectively saying that the expertise in choosing strategies,
managers, portfolio weightings is a commoditised business worth
paying 1% of assets or less. At Oklahoma, redeeming from
resulted in savings of $1 million in fees and costs.
Oklahoma found the decision to ask its incumbent long/short
equity FoHF, Grosvenor Capital Management, to assist it in its
plan to allocate directly a relatively easy one.
Meanwhile in Colorado, working closely with K2 and GAM, the
pension fund was able to
establish niche long/short equity portfolios and to source
global macro managers. At the same time, the fund is using
Albourne to aid in manager due diligence.
Essentially, FoHFs are victims of circumstance to some
degree. Following Madoff, a number of FoHFs had to battle both
poor public image and poor returns. According to the prevailing
public relations spin, choosing hedge funds did not require any
rare or exceptional talent. The stage was set for a new,
seemingly more cost-effective and less controversial way to
allocate to hedge funds.
In the short term at least, the result of this ghost FoHF
protocol is that investors are able to hold on to their former
FoHF holdings under the employ of a specialist consultant
and/or FoHF adviser. So instead of a large number of
institutional FoHFs products (offered by firms like those in
the InvestHedge Billion Dollar Club, for instance) the future
seems to point to just more than a handful of consultant/FoHF
adviser-driven portfolio types created in cookie-cutter fashion
There is no concrete evidence yet for increased performance
of consultant-driven portfolios over the long term or that
FoHFs can earn back their fees in the short term.
Outperformance with consultant-led portfolios is a bet though
that many pensions are willing to make in the US, while UK
pension schemes are likely to follow suit as consultants call
FoHFs to account for poor 2012 performance.
In the UK, the Avon Pension Fund will decide at its next
whether to fire Man for underperformance. Its four fund of
hedge fund managers – Signet, Stenham, Gottex and Man
– have produced negative relative returns over three
years, and hence did not meet their three-year target
Should these ghost FoHF portfolios lead to a wholesale
scrapping of distinct hedge fund allocations is also unclear.
Certainly if these FoHF ghost programmes do well it will not be
the FoHF taking the credit for a previous allocation decision,
as many report to specialist consultants. These consultants
seem to be eager to offer hedge fund advisory services on a
scale larger than what the FoHF industry ever handled for
It leads one to wonder, though, whether FoHFs really hope
that their 'ghost’ portfolios will be haunting
enough to win back the business they have already lost.