Texas and CalSTRS keep emerging managers on the radar

May 23, 2014  

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By Kristen Schultheiss

Emerging hedge fund managers were a persistent topic of focus throughout the discussions at SkyBridge Capital’s SkyBridge Alternatives (SALT) conference in Las Vegas.

Stuart Bernstein, senior investment manager at Teacher Retirement System of Texas, and Philip Larrieu, an investment officer at California State Teachers’ Retirement System (CalSTRS), both offered perspectives on deal sizing, strategy and merits of early-stage investing in separate panel discussions.

Larrieu seemed to be a bit more hesitant in investing in emerging managers for the CalSTRS hedge fund portfolio. "Public pension funds don’t like to be the first one in the fund," he said – although he added that CalSTRS had been an early investor in Trian Partners as well as Blue Harbour Group.

Once an emerging manager has already attracted one pension fund investor such as CalSTRS, then it is easier for the manager to be approved by other similar plans, Larrieu said. As a $184 billion scheme, the California system typically allocates $100 million to individual hedge funds. So it is structurally difficult for CalSTRS to make such a large commitment to an emerging manager, according to Larrieu.

CalSTRS has made a recent allocation, however, to Legion Partners, a start-up Los Angeles-based activist manager that CalSTRS has seeded. "Our reasoning for the commitment comes down to our familiarity with the team, their focus on true small-cap investing, which is hard to find, and the attractiveness of their economics and alignment of interests," said Ricardo Duran, spokesman for the retirement system.

The $200 million commitment to Legion Partners took place in February as part of CalSTRS’ corporate governance portfolio within its global equities asset class. All activist managers are placed within the fund’s corporate governance portfolio and do not appear under the absolute return asset class. CalSTRS overall has less than a 1% allocation to its absolute return asset class.

The $117 billion Texas Teachers’ retirement system has a 12% allocation to hedge funds. According to Bernstein, the Texas scheme has 48 different hedge funds of various strategies in its portfolio – often ranging from $100 million to $200 million in investment size.

He believes that building a portfolio of smaller managers may greatly benefit the performance of the system’s overall hedge fund portfolio. "We are very much investing in funds that we believe are going to grow," he said.

Bernstein revealed that the Texas system makes smaller investments of $5 million to $10 million in new managers as part of its emerging manager programme. The investment committee will consider managers with a minimum 18-month track record.

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