Strategy diversity grows as institutional investors cast a wide net in the hedge fund ocean

July 07, 2014  

Fund overlap highlighted as direct allocators concentrate $15 billion with a core set of brand names

By Susan Barreto and Kristen Schultheiss

 
    
Investors and their underlying hedge funds seem to be riding the same wave these days. This wave may be fuelled by an unbridled optimism that sees hedge funds as the best way to protect assets over the long term and at the same time boost the performance of strategy buckets such as fixed income that are producing low returns at the moment.

Taking a look at InvestHedge's monthly institutional hedge fund allocator activity for the year ending June 2014, more than $15 billion flowed into 226 mandates. While not a complete global picture, the annual survey of allocators' choices highlights which funds of hedge funds (FoHFs) and hedge funds are popular with consultants and their underlying clients. The popularity of hedge funds continues to grow despite lower returns in some strategies and a backdrop of long-only equity gains stealing long/short managers' thunder.

For the investors of the $3.4 trillion of capital, the current trend is one of rounding out direct hedge fund portfolios, and in some cases trimming and redefining FoHF programmes. It is a tale of the fishermen fighting to reel in the fish as consultants move toward replacing the role of FoHFs, while the FoHFs themselves fight the tide to offer consulting where the clients chooses to allocate directly.

In many cases, rightly or wrongly, fees seem to be the ultimate deciding factor, but partnership and collaboration between hedge funds and their investors seems to be emerging as the way forward. According to a recent survey by Barclays and the Alternative Investment Management Association (AIMA) called The Extra Mile: Partnerships between hedge funds and their investors, more than three-quarters of managers and two-thirds of investors who took part in the survey said they entered partnerships.

What is clearer with this hedge fund activity analysis year on year is that hedge funds are no longer necessarily relegated to the opportunistic or alternatives bucket, and the increase in asset flows to hedge funds is starting to show up as hedge funds can now be found in both traditional equity and bond portfolios.

Unsurprisingly, the five largest allocators to hedge funds according to the InvestHedge records over the past year are US public pensions; this is largely due to the fact that these types of investors are required to be more transparent than others. These pension funds have taken some political heat for their asset-allocation decisions and specifically to the hefty fees they are paying to some hedge fund managers. They are also leading the way in helping some of the largest hedge fund managers grow even further, with ticket sizes ranging from $100 million to $250 million apiece.

 
    
Leading the list of bountiful hedge fund investors is the $83 billion New Jersey Division of Investment, which has allocated $2.3 billion in new capital to hedge fund managers this past year. New Jersey Division of Investment oversees the investment management of seven pension funds that make up the New Jersey Pension Fund. The division made hedge fund commitments to Och Ziff, JANA, GSO, Solus, MKP, Claren Road, Scopia PX, Brevan Howard and BlueCrest.

The New Jersey Pension fund had previously invested with a multiple of these managers. The pension fund lists: OZ Domestic Partners II and OZNJ Private Opportunities with inception dates of June 2006 and March 2013 respectively; GSO Special Situations Fund and GSO Credit Partners - A, which launched in February 2012 and March 2012, respectively; Claren Road Credit Master Fund, (launched June 2012); Scopia PX (January 2013); Brevan Howard Fund (November 2011); and BlueCrest Capital Management (April 2012).

More recently, the division approved a $150 million addition to an original $250 million investment with GSO Credit - A Partners and proposed a $100 million investment in the JANA Strategic Investment Fund, as reported in InvestHedge in September 2013. New Jersey has more than $8.6 billion committed to hedge funds, including nearly 40 direct hedge fund commitments across all asset classes as well as five hedge funds of funds commitments.

Cliffwater acts as its hedge fund consultant, but the firm's contract will expire on 10 August. A request for proposal was posted on the division's website on 1 May and the division is looking for a consultant to agree on a three-year agreement that will take effect on 11 August. According to Christopher Santarelli, deputy director of communications at New Jersey's Treasury Department, Cliffwater is welcome to bid for a new RFP.

The second-largest allocator, the Ohio Public Employees Retirement System (OPERS), is also a client of Cliffwater's. Indeed, looking at the manager overlap chart, from InvestHedge's snapshot of institutional investor allocator activity, Cliffwater is the most active consultant adviing in direct investments to hedge funds for the survey period, year ending June 2014, having assisted in the allocation of $4.7 billion.

While far removed from hedge fund hubs in New York City and London, this $74 billion pension fund aimed to round out its hedge fund programme with $1.5 billion in new allocations over the past year. The Ohio Public Employees Retirement System made commitments to JANA Nirvana, Discovery Global, Beach Point, CQS, Chatham Asset, Arrowgrass, Lakewood, BHR Capital, Taconic, Brigade, Graham Global, Canyon Value, KLS, Och-Ziff, Highline and GoldenTree this year.

In 2013, the system increased its target allocation to hedge funds to 8% in the Defined Benefit Fund and to 6% in the Health Care Fund. With respect to the size of the funds, the overall size of the hedge funds sub-asset class, a part of the alternatives asset class, would increase from $5 billion to $6.6 billion.

 
    
OPERS began to perform due diligence and hire many hedge funds to reach its new target allocation. It hired JANA Partners in summer 2013 to manage $100 million in a value-oriented, event-driven hedge fund, focusing on firms implementing or considering strategic change (InvestHedge, July 2013). JANA was the pension fund's fifth investment within the event-driven allocation of its hedge fund portfolio.

The system added $50 million to a $100 million commitment with Discovery Global Macro Partnership in autumn 2013, bringing the allocation to the macro/discretionary hedge fund to $150 million (InvestHedge, October 2013).

A $50 million commitment was made to the CQS Diversified Fund, a credit-oriented, multi-strategy fund that allocates money across six distinct underlying CQS-managed hedge funds. The multi-fund, single-manager structure was reported to total more than $1 billion in assets at the time (InvestHedge, November 2013). Last December, InvestHedge reported the doubling of Ohio's CQS mandate to $100 million.

OPERS continued to diversify its hedge fund holdings in early 2014. The system hired Chatham Asset Partners to manage $50 million in a trading-oriented long/short fund that invests in high-yield bonds and levered loans. Arrowgrass was given an additional $50 million allocation to its multi-strategy fund, which grew the total commitment to $280 million. Lakewood Capital Partners' opportunistic, value-oriented, long/short equity fund received an initial $25 million. After continuing to hire new hedge funds and add to existing ones, the system now has approximately $6.2 billion invested.

Proving once again that investors in the oil-rich land of Texas can be some of the most savvy investors, the $22 billion Texas Municipal Retirement System allocated $1.1 billion to Blackstone Alternative Asset Management. The Texas pension fund has established a recent 5% allocation to absolute return strategy funds. Separately, a total of $750 million has gone to three hedge funds within the pension fund's fixed-income programme.

Earlier this year, TJ Carlson, the system's chief investment officer, outlined expectations to implement an absolute return asset class that would be one-third allocated to hedge fund of funds and two-thirds allocated to direct hedge funds. Tom Shupp of RV Kuhns, a smaller but still powerful player in the hedge fund game advising Illinois Teachers Retirement System and New York State Common Retirement Fund to name a few, presented the goals of the new programme, which included increasing portfolio returns, decreasing portfolio risk and providing performance with low correlation to traditional asset classes with a small allocation.

After reviewing different types of absolute return strategies such as long/short equity, relative value and event-driven, Shupp explained that the Texas Municipal Retirement System's objective is to have a multi-strategy absolute return fund of funds.

It was decided that a fund-of-one would be the initial structure and although it would call for an extra layer of fees, the structure would provide greater transparency. The structure is such that Texas Municipal Retirement System owns the fund and is the only limited partner, while Blackstone is the general partner.

The manager search process began with 17 candidates, and was then narrowed down to four managers, with Blackstone chosen in the end. To be considered, a management firm had to have at least $7.5 billion in assets under management, a 10-year track record and experience in managing a custom portfolio with five fund-of-one accounts. The negotiated management fee for Blackstone concluded at 35 basis points with performance fees.

The system's overall target mix is 30% core fixed income, 17.5% domestic equity, 17.5% international equity, 10% non-core fixed income, 10% real estate, 5% absolute return, 5% real return and 5% private equity.

Ranking fourth in the InvestHedge table of institutional allocators (pages 20-21) are the New York City Employees' pension funds, which have been slow to allocate to hedge funds - although many potential managers line the city's streets. The combined $139 billion in pension assets has employed local consulting firm Aksia, a dedicated hedge fund consulting firm that allocated $2.5 billion directly, according to InvestHedge records.

New York City Employees' Retirement Systems added $1.05 billion to hedge funds over the past 12 months, with commitments to Cantab Capital Partners, Fir Tree, Carlson Capital, Perry and Pharo.

InvestHedge reported the hires of Carlson, Perry and Pharo last September. Carlson Capital received the largest allocation - a $250 million commitment comprising $138 million from the New York City Employees fund, $85 million from the police pension fund and $27 million from the firefighters' pension fund.

Perry Capital received $200 million from the New York City systems in an allocation comprising $110 million from the employees' fund, $68 million from the police pension and $22 million from the firefighters' fund. The systems allocated $150 million to the London-based Pharo Macro Fund, and $83 million of the overall commitment came from the employees' pension fund.

Cantab Capital Partners and Fir Tree Partners were hired in the summer of 2013. Cantab was given $200 million to manage in its tactical trading strategy hedge fund, while Fir Tree was allocated $250 million to manage in an event-driven fund.

The New York City Retirement Systems had more than $2.2 billion allocated to hedge funds and nearly $4 billion was set aside for the asset class in 2013.

As of 31 March 2014, New York City Pension Funds listed its asset mix as 40.8% US equity, 29.8% fixed income, 17% international equity, 6.1% private equity, 3.3% private real estate, 2% hedge funds and 1% cash. Only three of the five pension funds in the New York City system had hedge fund allocations at that time. The teachers' and board of education funds did not have hedge fund allocations.

Rounding out the top five allocators of the past 12 months is the $130 billion Florida State Board of Administration. Florida added $725 million to its hedge fund portfolio this year with allocations to Three Bridges Europe Fund, Litespeed Partners, HBK, Luxor Capital, JHL Capital Group and Davidson Kempner.

The Florida Retirement System Pension Plan made a $75 million commitment to Three Bridges Europe Fund, a long/short equity hedge fund, as part of its strategic investments programme (InvestHedge, September 2013). Last November, Davidson Kempner Institutional Partners was hired for $200 million. In the last quarter of 2013, Florida added Litespeed Partners and HBK to its hedge fund portfolio. The $150 million investment in HBK Fund II was for an "absolute return flexible mandate". The fund was a multi-strategy offering. The $100 million investment with Litespeed was for an event-driven fund.

The board defines its strategic investments programme as a portfolio that may contain direct investments or investments in capital commitment partnerships, hedge fund or other vehicles that make or involve non-traditional, opportunistic and/or long or short investments in marketable and non-marketable debt, equity and/or real assets such as real estate, infrastructure or commodities (InvestHedge, September 2013).

Florida's strategic asset class returned 15.69% in 2013. During the first quarter of 2014, Florida State Board hired two more hedge funds. The board committed $100 million each to Luxor Capital Partners, an absolute return/event driven hedge fund, and JHL Capital Group Fund, an opportunistic hedge fund. According to the administration's director of communications, Dennis MacKee, the fund is working towards reaching its 12% strategic investments allocation (InvestHedge, May 2014).

Despite two of the top allocators relying on the same consulting firm, their recent hedge fund picks do not overlap. Managers in those portfolios are some of the most popular institutional brand names such as: Cantab Capital, Brevan Howard, MKP, Och-Ziff and JANA among others (see chart on page 19). None of these hedge fund names are new to US chief investment officers.

Interestingly, the most used consultants among hedge fund allocators do have some of the same picks. In the InvestHedge tally, 19 hedge fund brands are shared by the most heavily used consultants: Cliffwater, Aksia, RV Kuhns, Cambridge and Albourne. The brands shared (see chart on page 17) include AQR, Graham Capital, Davidson Kempner, DE Shaw, CQS, Blackstone, Brevan Howard, Carlson, Cantab, GoldenTree, HBK, JANA, Luxor, Magnetar, MKP, Och-Ziff, Samlyn, Scopia and York.

For instance, York Capital is a pick of both Cliffwater and Albourne, with pension funds such Texas County & District and Kern County Employees Retirement Association making allocations to James Dinan's hedge fund over the past 12 months.

Carlson Capital is another popular example, which is a multi-strategy firm that has been a favourite of Aksia, RV Kuhns and Albourne. The firm's $6 billion-plus Double Black Diamond fund has performed well, with gains of more than 8% in 2013. This fund has grown quickly in that it started 2013 at $4.4 billion in capital, according to the Absolute Return database.

Another popular hedge fund catch is Och-Ziff, which was also a top pick in 2012 (InvestHedge, March 2013). Cliffwater and Albourne clients made commitments to the hedge fund firm, which with $44 billion in assets currently ranks third in the HFI Global Billion Dollar Club™. According to regulatory filings, the OZ Master Fund was up 1.42% in May. With a variety of strategies under managment, the firm is a good example of what is in demand by institutional investors - diverse strategies with positive return prospects.

InvestHedge has taken a snapshot of 30 of the most active US hedge fund allocators of the past year (InvestHedge, June 2014) to see what institutional investor hedge fund returns really look like. Not surprisingly, given the return dispersion among hedge funds, the InvestHedge 30 USA - a snapshot of returns of active US hedge fund allocations - also saw a wide dispersion of returns. The worst performer was Chicago Transit Authority Employees Retirement's small $198 million portfolio, which had a meagre annual net gain of 4.81%; and the top performer was Nashville and Davidson County's $270 million programme, which returned more than 17%.

Of the groups allocating the most to hedge funds over the past year, Florida had the best 2013 performance of 15.69% - which was outstanding if compared to the overall portfolio returns of 10.12% - while New Jersey reported gains of 13% over the same time period with its total portfolio returns up 14.42%.

Another trend among allocators is the comeback of FoHFs. Billions went into FoHFs over the past 12 months, which also showed their flexibility in providing advisory services, customised accounts and mutual fund vehicles to alpha-hungry investors. FoHFs are in the process of rebuilding and rebranding themselves as they compete with consultants that are also offering similiar services. Fees are part of the differential, as was recently seen in Massachusetts, where Arden wrested an advisory mandate away from Cliffwater (see page 5).

The concept of customisation is central to the revival of the fund of hedge funds business and to the increasing partnership between hedge funds and their investors as outlined in the recent Barclays/AIMA Report. FoHFs that saw mandates over this past year include: Blackstone Alternative Asset Management, Grosvenor Capital Management, FinTan Partners, Lighthouse Partners, Rock Creek Group, Pluscios Management, EnTrust Capital Partners, KKR Prisma, UBS and SkyBridge Capital.

Much of this activity has taken place in the US, but in the UK and elsewhere investors are seeking to lean on both FoHFs and single-manager hedge funds to preserve and protect capital. The largest non-US allocators this year include RBS Pension Fund and the Korea Post Insurance, which hired single hedge fund managers and FoHFs respectively.

At $43 billion, RBS is one of the largest schemes in the UK. It added positions to Millburn Ridgefield and Cantab Capital Partners to build out the commodity trading adviser and global macro holdings in its $857 million hedge fund portfolio. Meanwhile, the Korea Post fund appointed UBS Stable Alpha and SkyBridge Capital. As a $57 billion allocator, the Korea Post only has $300 million allocated to hedge funds, the majority of which are allocated directly.

While many UK and ex-US pensions have been moving directly into hedge funds, FoHFs still have a significant role to play and indeed have won mandates. In the UK, the $2.3 billion Royal County of Berkshire Pension Fund selected Grosvenor Capital Management to act as an adviser when the pension fund sought to overhaul its alternatives allocation. The move highlights the flexibility of the FoHF community to act as portfolio advisers and the growing interest of consultants to offer customised hedge fund portfolios in competition with FoHFs.

Fees are often the key issue and the tipping point in making these long-term portfolio decisions. The $2 billion Daily Mail and General Trust pension restructured its $236 million hedge fund portfolio in a move that more than halved its fee schedule by allocating directly to three large hedge fund brands (AQR, Cantab and Claren Road). The moves followed the redemption from K2 Advisors last year.

Another UK fund, Cadbury Schweppes, ended its contracts with Blackstone Alternative Asset Management and K2 Advisors. Trustees replaced its FoHFs with Towers Watson and BlackRock Alternative Advisors. Towers Watson, not unlike other consultants, has steadily been moving into the asset management space and is now even included in InvestHedge rankings of professional hedge fund allocators, the majority of which are funds of hedge funds.

In both of these pension funds, the portfolios in question are just over $200 million. Traditionally these would be of just the right size for a commingled FoHF product. Now as investors remain hyper focused on fees in light of lower hedge fund returns, it seems that no portfolio is too small to go direct and be allocated across numerous strategies and managers to achieve optimal downside protection.

How the FoHF and consultant advisory field plays out in the eyes of the end-investors will be an interesting dynamic to watch; and one that is only likely to be clear after comparing performance net of fees now with that in a few years' time. However the advisory landscape develops, one of the key risks that investors need to be aware of is the concentration of too many assets in the hands of too few names. If asset management history has shown us anything, when one allocator pulls the others follow, and the exit stampede usually ends in the destruction or near destruction of businesses.

On the bright side, however, the 2013 InvestHedge institutional allocator activity round-up shows an increase in assets allocated to both FoHFs and hedge funds, and evidence to support the notion that hedge funds to a significant number of investors are no longer an expensive 'nice to have' toy in the portfolio but an essential portfolio management tool. 

 




Institutional investors, their consultants and managers hired

Institutional investor Fund size ($bn) Consultant Managers hired Allocation total ($m)
New Jersey Division of Investment 83.0 Cliffwater Brevan Howard, BlueCrest, Claren Road, GSO, JANA, MKP, Och Ziff, Scopia PX, Solus 2,300
Ohio Public Employees Retirement System 74.0 Cliffwater Arrowgrass, Beach Point, BHR Capital, Brigade, Canyon Value, Chatham Asset, CQS, Discovery Global, GoldenTree, Graham Global, Highline, JANA Nirvana, KLS, Lakewood, Och-Ziff, Taconic 1,550
Texas Municipal Retirement System 22.4 RV Kuhns Blackstone (customised FoHF) 1,100
New York City Employees' Retirement (c/o NYC Comptroller) 139.0 Aksia Cantab Capital Partners, Carlson Capital, Fir Tree, Perry, Pharo 1,050
Florida State Board of Administration 130.0 Cambridge Associates HBK, JHL Capital Group, Litespeed Partners, Luxor Capital, Three Bridges Europe Fund; and added on to Davidson Kempner 725
New York State Common Retirement Fund 159.0 RV Kuhns Horizon Portfolio, Marshall Wace, OxAM Quant, Pine Street Alternative (emerging managers) 575
Indiana Public Employees' Retirement Fund 28.00 Aksia AQR, Blackstone (FoHF), Bridgewater, DE Shaw, First Quadrant 555
Orange County Employees Retirement System 11.0 Aksia Capula, DE Shaw, Gotham, Highfields, Hoplite, Ionic Event Driven Fund, Och-Ziff, PFM Healthcare 515
Texas County & District Retirement System 21.7 Cliffwater AG Super Fund, Brevan Howard, ESG Cross Border, Highline, Lakewood, MKP, OZ, York Capital 420
Royal County of Berkshire Pension Fund 2.3   Grosvenor Capital Management (FoHF for portfolio review) 403
Pennsylvania Public School Employees' RS 49.0 Aksia DE Shaw, Perry Partners 400
New Mexico Educational Retirement Board 10.70 NEPC Marathon European Credit Fund, Orchard Global Capital Group's Black Forest fund 300
California State Teachers' Retirement System 184.0 Lyxor Asset Mgt BlackRock Fixed Income Global Alpha fund, Legion Partners 250
Daily Mail and General Trust   bfinance AQR, Cantab, Claren Road 236
Cadbury Schweppes 2.8   BlackRock for hedge fund programme and Towers Watson 224
London Borough of Camden Pension Fund 1.90 Aon Hewitt Insight Investment 202
Illinois Teachers Retirement System 40.0 RV Kuhns Carlson Capital (Black Diamond), Magnetar Financial 200
Michigan Municipal Employees' Retirement System 8.90 None Napier Park 200
Oregon Investment Council 65.0   AQR Style Premia Fund 200
Colorado Fire & Police Association 3.0 Albourne Partners AQR Delta, AQR Style Premia, Brevan Howard, Graham Tactical Trend, MKP Capital 194
RBS Pension Fund 43.0   Cantab, Millburn Ridgefield 167
Kingfisher Pension Scheme     LGT Capital Partners (FoHF) 152
New Hampshire Retirement System 7 NEPC Standard Life Investments 150
Philadelphia Board of Pensions & Retirement 4.5 Cliffwater Archview Offshore, Avenue Coppers, Blue Harbour, Kildonan Castle Partners 150
Kern County Employees Retirement Association 3.5 Albourne Amici, Aristeia, Carlson Capital, Davidson Kempner, DE Shaw, HBK, Indus, Magnetar, MKP, Och-Ziff, York 134
California Public Employees' Retirement System 282 Wilshire Kylin Eureka Fund 130
North Carolina Retirement Systems 83.0 Hewitt EnnisKnupp Claren Road Credit Opportunities Partners 130
Arkansas Public Employees Retirement System 6.0 Callan Associates Blackstone Alternative Asset Management (FoHF) 125
Elo 1.20   GAM Star Global Rates fund, Kepos Alpha, Man AHL Evolution Fund 123
Kentucky Retirement System 11.70 Albourne Coatue Qualified, JANA Partners, LibreMax, Luxor Capital, Pine River, Scopia Capital 120
Phoenix Employees Retirement System 2.10 RV Kuhns Carlson Capital, Fir Tree Partners 120
Rhode Island Employees Retirement System 8.00 Cliffwater ESG's Cross Border Equity Fund, Luxor Capital, Samlyn 120
Cincinnati Retirement System 2.2 Marquette Fintan Partners (FoHF) 110
Kansas Public Employees Retirement System 15.70 PCA Franklin Advisors 100
Massachusetts PRIM Board 55.00 Cliffwater Cantab Capital Partners' global macro fund 100
Teacher Retirement System of Texas 124.00 Hamilton Lane TPG Opportunities Partners III for private equity 100
Teachers' Retirement System of the State of Illinois 42.80   Carlson Capital 100
Korea Post - Insurance Bureau 57.0   SkyBridge Capital, UBS Stable Alpha Fund (both FoHFs) 97
Kansas City (Mo.) Police Retirement System 0.87   Grosvenor (customised FoHFs) 91
Shropshire Pension Fund 1.6 AON Hewitt Hires Brevan Howard 86
Institutional investor Fund size ($bn) Consultant Managers hired Allocation total ($m)
Haringey Pension Fund 1.45 Mercer Hired CQS 75
Oklahoma Firefighters Pension & Retirement System 2.00 The Bogdahn Gp Private advisers (low-volatility FoHFs) 70
Sacramento County Employees Retirement System 7.50 Cliffwater Brevan Howard, Laurion Capital 70
San Jose Federated City Employees 2.0 Meketa Claren Road, Horizon, Hudson Bay, Sandler 60
Greater Manchester Pension Fund 21.0   Added two absolute return special opportunities portfolios 57
Hartford Municipal Employees Retirement System 1.02 NEPC Grosvenor Capital Management 50
Louisiana State Employees' Retirement System 10 NEPC EnTrust Capital (FoHF) 50
Maryland State Retirement Agency 42.0 Albourne Partners Taylor Woods Capital Management 50
Metropolitan Government of Nashville and Davidson County 2.70 Summit Strategies Group Marathon European Credit Opportunities Fund II 50
Ohio School Employees Retirement System 12 Aksia GoldenTree Structured Products Opportunities Fund 50
San Jose Police and Fire Department 3.0 NEPC Claren Road, Horizon, Hudson Bay, Sandler 50
Texas Employees Retirement System 24.2 Albourne Magnetar Capital 50
Virginia Retirement System 62.3   Arisaig Partners 50
West Virginia Investment Management Board 13.2 Albourne Carlson Capital's Double Black Diamond fund, CQS 45
Oklahoma Municipal Retirement Fund 0.44 Asset Consulting Group Addison Clark, AKO Capital, Capital Advisors, Cevian Capital, Hoplite Partners, Jet Capital Investors, Kingdon, Southpoint, Tremblant, Trian, White Elm 44
Chicago Laborers Annuity & Benefit Fund 1.40 NEPC Lighthouse Investment Partners, Pluscios, Rock Creek (all FoHFs) 31
Pennsylvania State Employees' Retirement Board 26.00 Albourne Partners Samlyn Onshore, Stelliam 30
Fort Worth Employees' Retirement Fund 2.0 Albourne Partners Cevian Capital, Pentwater 29
Jackson Health System Public Health Trust 0.58 Hewitt EnnisKnupp Blackstone Partners Fund (FoHF) 29
Alaska Permanent Fund Corporation 49.90 Callan Associates Oaktree Emerging Market Opportunities 25
Hartford Healthcare 2.4 Aksia Neuberger Berman Absolute AR Multi-Mngr Fund, North Run Capital 25
Croydon Pension Fund 0.8 AON Hewitt BlueCrest Capital Management 23
City of Omaha Employees Retirement System     SSARIS Advisors 17
Daniel Thwaites 1959 Pension Scheme 0.1 Aon Hewitt Barings Asset Management's Dynamic Asset Allocation Fund 17
San Joaquin County Employees Retirement Association 2.30 Strategic Investment Marinus Capital Advisors 15
Gjensidige     Goldman Sachs Global Opportunities Offshore Fund 13
Chicago Transit Authority Employees Retirement Plan 1.90 Gray & Co. Graham Capital Management 10
Louisiana State Police Retirement System 0.60 UBS/Painewebber EnTrust, Prisma Capital (both FoHFs) 8
Waltham Forest Pension Fund 0.8   Markham Rae 8
University of Houston 0.59 Cambridge Samlyn Offshore 5
Albuquerque Community Foundation 0.05 Slocum BlackRock Tempus, Magnitude International 4
Pinellas Park (Fla.) Firefighters' Pension Fund 0.03 The Bogdahn Gp PIMCO's Tactical Opportunities Fund 1
American Beacon Advisors 30.00   AHL Partners  
AP1 32.0   Bridgewater  
BlackRock     Benefit Street, Carl M. Loeb, Independence Capital, LibreMax, MeehanCombs, Peak6, QMS Capital, Saiers Capital  
Deutsche Asset & Wealth Management 1,280.00   Atlantic Investment Mgmt, Chilton Capital, Omega Advisors; Lazard as subadvisers  
Hong Kong Jockey Club 9.00   Millennium Management, Och-Ziff  
Lafarge UK Pension Plans 4.0 KPMG Towers Watson as fiduciary CIO  
Nobel Foundation     Convexity, Millennium, Two Sigma  
Pension Protection Fund 18.0   AQR, Arrowgrass Capital, Brevan Howard, Caxton, Fortress, GMO, Harmonic, Man, Two Sigma  
Riksbanksens Jubileumsfond 1.50   Carve, Observatory Capital, Ram One, Rhenman Healthcare  
TfL Pension Scheme 11.0 Towers Watson Arrowgrass, BlueCrest, BlueTrend, Brevan Howard, Nephila, Och Ziff  
Totals 3,466.43     15,114.60


Industry to double assets to $5.8 billion by 2018, says Citi

Hedge fund assets under management continue to grow, investor appetite seems to be on the upswing, and the types of investors allocating to hedge funds continues to broaden as hedge funds switch over from being a pure risk management must to a tool for optimisation, if recent figures compiled by Citi Investor Services are any indication.

Citi's fifth annual survey - Opportunities and challenges for hedge funds in the coming era of optimisation - shows that institutional investors continue to increase their hedge fund allocations despite many funds significantly underperforming major equity indices. The second diversification trend Citi found is the shift to multiple tiers of investors, each focused on a unique hedge fund segment, and the growing divergence in the profile of hedge funds that align to each of those tiers.

The hedge fund industry is primed to double its assets from $2.9 billion in 2013 to $5.8 trillion in 2018, according to Citi. For this to happen, hedge fund firms are reinventing themselves on a massive scale - offering retail products and long-only portfolios to a wider investor audience.

Hedge funds are expanding into functions beyond their traditional asset management role, increasingly working with investors in an advisory capacity to support their clients' portfolios. This is on top of expanding access to retail investors and creating customised solutions for institutional investors.

The most obvious area where the shifting investor demographic can be found is in the alternative mutual fund arena legislated by the 1940 Act. Net investor flows into these products were $95 billion in 2013 versus only $67 billion for the entire global hedge fund industry, according to Citi. The group predicts that assets in these products (excluding alternative ETFs) will rise from $261 billion at the end of 2013 to $879 billion by 2018. Dynamic growth here should spill over and help support growth in alternative UCITS, where it sees assets doubling from $310 billion in 2013 to $624 billion by 2018.

Publicly offered funds will thus offer a further $1.5 trillion in additional alternative industry assets. Citi forecasts that 50% of those assets are being advised by managers also running hedge fund products. By 2018, that figure is expected to rise to 65%.

Part of this growth may be fuelled by defined contribution plans. Hartford HealthCare (see chart on page 19) made its foray with an alternative mutual fund last year. Citi sees renewed interest on the part of hedge fund managers to introduce closed-end interval funds, with several blue-chip managers registering products with the SEC in 2014. Investor appetite in this area will likely grow through the offering of target-date funds that incorporate alts.

Then there is the other side of the coin, where institutional investors are increasing their assets in hedge funds via direct allocations to single-manager funds, much of what has been included mandate coverage in InvestHedge over the past five years or so. This year was no exception, with more investors choosing to go direct.

Direct allocators are targeting managers with between $1 billion and $5 billion in capital as it is thought they are in the best position to absorb larger ticket sizes of at least $100 million, according to Citi. InvestHedge has tracked institutional allocator mandates of varying sizes but only a select few are at that $100 million level, with those allocations coming from large US public pension plans that have in some instances increased their hedge fund allocations and are growing their commitments to their existing hedge fund managers.

In its survey, Citi finds that large pensions and sovereign wealth funds supported in consultants' manager selection have focused on the industry's largest firms post the global financial crisis (see chart, below). This has helped to drive the average allocation for firms with more than $5 billion in AUM by 127% between 2008 and 2013.

What this has translated into is plenty of repetition of hedge fund brands across the institutional investor spectrum and significant overlap among hedge fund consultants (see chart on page 19).

For non-retail investors and non-institutional purchasers of hedge funds this has created an uneasy relationship with large hedge fund brands that in some cases they may have been invested in years previously. This has forced some investors, such as family offices, to focus on smaller niche managers. Hedge fund assets from high-net-worth and family office investors spiked by 19% in 2013, according to the Citi survey. Assets within this investor segment are back up to $907 billion, or just 8% below their record level in 2007.

These investors say they were looking for managers who would be more aggressive about pursuing alpha opportunities as opposed to aiming for the steady returns and low volatility of managers that institutional investors crave. Family offices are willing to support managers with more concentrated portfolios and higher volatility to achieve these aims. These goals align to the classic hedge fund profile that was in place prior to the influx of institutional capital, beginning in 2002.

Another investor subset left out of the institutional investor mandate summary is the small and mid-sized US and Canadian endowments that have been boosting their allocations to hedge fund managers over the past several years. This closes a gap, Citi officials say, that had existed between their share of capital earmarked for hedge fund managers as compared to the share allocated by the largest endowments with $1 billion plus in investable assets.

In adopting absolute return funds for hedging across their portfolio, it is thought investors of all types will consider more credit-related hedge fund strategies. According to the Citi survey, investors are interested in using credit-focused strategies for insurance to help insulate against the downside in investor's core credit positions.

Many investors have begun to move out the credit curve and into more opaque and illiquid products. To counter the extra risk this adds to the portfolio, they are working with credit hedge funds to carve out a longer-duration product. Citi views these new products as helpful in minimising possible asset-liability mismatches by ensuring the manager would be free to invest the capital and seek short-side profits without mass redemptions if there were to be another liquidity shock. 

 




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