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
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
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
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
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
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
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
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
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
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
UTIMCO: largest hedge fund manager holdings