UTIMCO acts as rainmaker to the cubs and grand cubs of the elite as it earns its bragging rights

July 05, 2013  

With more than $8bn-plus in hedge funds, UTIMCO believes in the power of alternative investing

By Susan Barreto

The adage, 'Everything’s Bigger in Texas’ does not stop at describing cowboy boots, belt buckles and egos. The endowment for the University of Texas is one of the nation’s largest and its staff now also claims to have the largest hedge fund programme among institutional investors, which could technically be ranked as among the largest global fund of hedge funds.

Recent negative press regarding losses in its strategic gold investments (reportedly north of $300 million) is only a minor part of the $28 billion endowment programme’s strategic risk management and alpha generation activities. In fact, just looking at hedge fund structures in the portfolio, the assets make up almost half of the overall endowment and speak to a belief in the long-term power of alpha generation via hedge fund managers and strategies.

Established in 1996, the University of Texas Investment Management Company (UTIMCO) is a non-profit corporation modelled after investment companies formed by Harvard University, Princeton University, Stanford University and Duke University to invest their respective endowment assets. UTIMCO was the first such investment office established by a public university. It oversees assets in the Permanent University Fund, Permanent Health Fund, Long Term Fund and Intermediate Term Fund.

With the majority of assets in the Permanent University Fund, UTIMCO has been able to use its size to allocate in a diverse grouping of hedge funds across its investment portfolio.

According to UTIMCO, investments are categorised into six asset classes (fixed income, credit-related fixed income, natural resources, real estate, developed country equities and emerging-market equities), and across three investment types (more correlated and constrained; less correlated and constrained; and private investments).

Hedge fund managers are primarily housed in the less correlated and constrained portfolio, which totals $8.4 billon. But UTIMCO has managers that manage long-only equity or very long-bias equity portfolios that are categorised within the more correlated and constrained book, several of which also manage a hedge fund portfolio. By including those allocations to hedge funds outside of the main programme, the actual allocation to hedge fund managers could be said to be more than $11 billion.

Texas is among the top five university endowments as ranked by size, but it has the largest allocation to hedge funds. UTIMCO is followed by Harvard, which has $5.2 billion invested in hedge funds, and Massachusetts Institute of Technology (MIT), which has $4.34 billion, according to InvestHedge’s endowment survey published in 2012. The $226 billion universe of largest US endowments ranked by dollar amounts invested in hedge funds has a total of $48 billion invested in hedge funds. The average allocation of this subset of the endowments is more than $2 billion each.

What also makes UTIMCO stand apart from its university endowment peers is that it also allocates to funds of hedge funds – Protégé Partners and Lone Peak. An emerging-manager fund of funds, Protégé has been nominated for the upcoming InvestHedge Awards for top risk-adjusted returns over five years as a small/emerging-manager specialist. While Protégé is well known for its backing of new managers, UTIMCO does not seed managers directly.

The University of Texas endowment increased its commitment to hedge funds by $2 billion since 2008, and in 2012 UTIMCO renewed its commitment to hedge funds across its investment programme with new allocations totalling $660 million. The moves came as trustees renewed their contract with Albourne America as the consultant overseeing the hedge fund initiative.

According to Cathy Iberg, president and deputy chief investment officer at UTIMCO, officials are having discussions as to whether or not to increase the size of the hedge fund allocation, but have not made any formal resolution to trustees at this time.

Iberg oversees the $8 billion-plus hedge fund programme and reports to Bruce Zimmerman, chief executive officer and CIO of UTIMCO. Prior to joining UTIMCO, Zimmerman was CIO and global head of pension investments at Citigroup. Previously at Citigroup, he had been CFO and chief administrative officer for Citigroup Alternative Investments, which invested more than $90 billion in proprietary and client capital across a range of hedge fund, private equity, private real estate equity and structured credit vehicles. He also serves on the board of trustees of the Commonfund and is an ex-officio member of the investment committee of the Houston Endowment.

Iberg heads a team of six investment staffers that oversee hedge funds at the endowment. Ryan Ruebsahm is senior director and Courtney Powers is a director of the hedge fund team. Ruebsahm and Powers each have an MBA from the University of Texas and more than six years’ experience at UTIMCO.

Hedge funds remain the single largest allocation at UTIMCO, remaining at roughly 30% of overall assets. According to UTIMCO, the hedge fund managers it selects use modest levels of leverage, provide substantial transparency, practise strong risk man-agement and generally approach investing with a value bias based on superior fundamental research.

In terms of comparing themselves with other university endowments, UTIMCO sees its peers as 21 other university portfolios including University of North Carolina (Chapel Hill); Columbia University; Duke University and University of Chicago (see table, below). This list of institutions represents endowment funds with more than 10 full-time employee positions, allocations to alternative assets in excess of 40% and with assets greater than $2.5 billion. All of these groups also happen to invest in hedge funds directly.

The University of Texas’ hedge fund holdings span a wide range of strategies. They are divided by capacity constraints, liquidity and strategy. The investment strategies represented include equities, fixed-income, emerging market equities and natural resources. Many of the managers are popular selections among institutional investors and carry global brand-name recognition such as Maverick, Viking, Baupost, Farallon, Perry Partners and Och Ziff.

The largest hedge fund manager allocation is to Value Act Capital, which manages $721 million in the long-only public equity portfolio. The largest hedge fund holding within the hedge fund programme itself, though, is a $630 million mandate with Maverick. The smallest mandates are with emerging-manager equity managers Praesidium and Prosperity.

In ranking itself among its peers, UTIMCO says its hedge fund portfolio is the largest among all US pension plans (public or private), and among the five largest among global pension plans. If the hedge fund programme were a stand-alone endowment, it would be the seventh-largest endowment in the US. Lining itself up among funds of hedge funds, it says it would be among the 25 largest in the world.

The goals of the hedge fund programme (or less correlated and constrained portfolio) are similar to those at other institutions in that the portfolio is designed to preserve capital while delivering equity-like returns with bond-like risk. It also is set up to diversify the more correlated and constrained investment and private investment portfolios. All of these objectives are in addition to the goal of adding value through active management, which is the traditional domain of hedge funds.

The portfolio has returned 8.3% annualised since its inception in 1998 up to the end of 2012, with a standard deviation of 6.3%. This essentially equals gains of $3.2 billion since inception. For the calendar year 2012, hedge funds returned 10.8% at UTIMCO. This far exceeded the benchmark of the HFRI FoHF index, which was up only 4.8%. Standard deviation was on a par with the index at 3.4% in 2012.

UTIMCO views its reputation as a long-time investor and dependable partner with hedge funds as part of its competitive advantages within its portfolio. The focus is on fundamental investing in strategies that the investment team understands. There are incremental changes to both strategies and managers over time, but due to its size and experience UTIMCO is able to invest in multi-year lock-ups when it is warranted and negotiate favourable fee arrangements. Fees on average are a 1.37% management fee, 19.4% incentive fee and a 12-month weighted average lock-up.

Its focus on long-term relationships has earned its managers a seven-year weighted-average tenure and investments in both 'children’ and 'grandchildren’ of long-time hedge fund managers. Roughly 62% of the portfolio is managed by Goldman Sachs, Soros and Tiger siblings. Such a pedigree is key to managers in the fundraising process, but for investors it is often a badge of honour to include these managers and to have access to any capacity they have to offer is a sign of a true and serious institutional player.

For instance, within the Goldman genealogy, there is Richard Perry of Perry Capital and Tom Steyer of Farallon. Spin-offs from those funds include Cadian’s Eric Bannasch, a former Perry manager, and Watershed’s Meridee Moore, formerly of Farallon. Another Farallon alumnus is Bill Duhamel of Route One. TPG-Axon’s Dinakar Singh is also notable, and a spin-off from his firm and Goldman alumnus Eric Mandleblatt of Soroban is also in the UTIMCO portfolio. Other institutional hedge fund giants of which UTIMCO boasts are Dan Och of Och Ziff and Eric Mindich of Eton Park, who are also two of the most renowned and successful Goldman alumni.

Tiger cubs in the UTIMCO portfolio include: Lee Ainslie’s Maverick, John Griffin’s Blue Ridge and Andreas Halvorsen’s Viking. 'Grandcubs’ in the UTIMCO fold include Chris Hansen of Valiant (formerly of Blue Ridge) and Rick Gerson of Falcon Edge (formerly also of Blue Ridge). Other Tiger cubs are Rob Pitts at Steadfast and Jim Flynn at Deerfield.

When it comes to Soros alumni, the list is smaller – with only four firms sharing the Soros heritage with UTIMCO. They are Betsy Battle’s Lone Peak fund of funds; Woodbine (Josh Berkowitz); Penta Asia (John Zwaanstra) and Indus (Sheldon Kasowitz). Battle, who ran the FoHF business at Soros, is expected to speak at the InvestHedge Forum

The hedge fund strategy mix at UTIMCO has changed very little since 2007, with a boost in long/short equity at the expense of the multi-strategy/event-driven allocation that shrunk to 29% in 2012 from 41% in 2007. Credit also grew slightly to 11% in 2012 from 3% in 2007. UTIMCO’s current strategy mix is 32% global long/short equity (including managers Blue Ridge and Maverick); 11% sector-focused long/short equity (Criterion and Cadian); 29% multi-strategy/event-driven (Perry and Baupost); 11% credit (Centerbridge and Silver Point); 9% macro/relative value (Bridgewater and Lone Peak); and 7% emerging market equity (Valiant and Janchor).

There are a total of 39 managers in the UTIMCO portfolio with six managers, with roughly $200 million of the portfolio being in the process of being liquidated. The endowment aims to add another $345 million to long/short equity and emerging-market managers in the coming months, according to board meeting reports posted online.

Much of the activity in the long/short equity area will be with three possible allocations: $75 million slated as an add-on allocation to a long/short equity specialist; $60 million going to a new commitment with a European long/short equity manager; and another $60 million that will potentially go to another long/short fund.

UTIMCO officials earlier this year said they expected that there would be a full redemption from one of the long/short equity managers currently in their portfolio. Managers were not named in the document, but existing managers in the developed country equity portion of the hedge fund portfolio include such top-shelf names as Maverick, Lansdowne, Och Ziff, Eton Park and Perry Partners.

Emerging markets will be another area of new investment, with $25 million going to an unnamed existing manager and potentially another $100 million being set aside for a new mandate. Some emerging-market managers already in UTIMCO’s portfolio include Moon Capital, Janchor Partners and Spin-naker. The expectation is that there will continue to be staggered redemptions from emerging markets as well. Last May, the emerging-markets equity portfolio saw a $25 million redemption from Moon Capital being re-allocated to Janchor.

The credit-related fixed-income portfolio recently saw net hedge fund allocations of $175 million with OZ Credit Opportunity and Mount Kellett Capital Partners II handling $100 million and $75 million, respectively. Other possible redemptions will be a $30 million to $60 million rebalancing from a large distressed credit mandate.

Also in 2012, new investments were made to Bridgewater PAMM totalling $79 million, while the same amount was redeemed from Bridgewater II in the investment-grade fixed-income portfolio. Other new allocations were to Farallon Asia Special Situations II ($60 million) and Lone Peak ($25 million).

Developed country equity markets was the most active strategy for hedge fund allocations with six managers splitting a total of $296 million in new capital. Funds selected to manage $50 million each were Viking Global Equities, AKO, Kingstown and Senator Global Opportunities. Gotham Diversified and Criterion Horizon Offshore were hired to handle $30 million and $66 million respectively.

Redemptions from developed country equity hedge funds totalled $252 million with FCOI II, Protégé Partners, Blue Ridge, Indus Japan, TPG Axon, Perry Partners, OZ Overseas Fund, Lansdowne UK and Eton Park giving capital back to UTIMCO.

The 20 largest hedge fund holdings in the UTIMCO portfolio total $4.4 billion, accounting for more than half of the portfolio. Those managers are: Perry, Och Ziff (which has four funds in the portfolio); Farallon (across four funds); Baupost; Blue Ridge; Centerbridge; Bridgewater (across two funds); Maverick; Eminence; and Steadfast. There has been little change in these manager names since 2007.

Roughly a quarter (23%) of the hedge fund portfolio is with 19 managers, of which 11 were added to the programme in the past five years, showing that UTIMCO is not satisfied with a passive approach to its hedge fund allocation. That said, the apple does not fall far from the family tree in that 10 of these managers are 'children’ or 'grandchildren’ of other long-term hedge fund relationships maintained by UTIMCO.

Staffers seem confident in the hedge fund programme’s ability to strategically allocate capital in the post-2008 era that has seen continued fund launches despite challenging returns in some strategies. Going forward with new allocations, UTIMCO is cognisant of the fact that generally since 2008 there has been increased capital moving into macro and commodity trading adviser strategies and net redemptions from equity/long/short strategies.

With a steady, tried-and-true base of managers, UTIMCO from its Austin, Texas offices seems to want to lead the endowment and institutional investor communities in allocating to the hedge fund industry’s best and brightest. It is all spelled out in its mission statement: "For the community, UTIMCO accepts its responsibilities as the manager for the largest public endowment fund in the United States and will act as a leader to advance endowment management practices at both public and private endowments."

UTIMCO: largest hedge fund manager holdings


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