Pensions Move to Direct Hedge Fund Investments?
Now, onto the latest topic, direct investments into hedge funds. Christine Williamson of Pensions & Investments reports, Move to direct hedge fund investments boosting business for consultants:
The pace of searches and hires is up sharply this year for specialist and general consultants advising institutional investors on direct hedge fund investments.
That increase is the result of the trend toward direct investment in single and multistrategy hedge funds and away from hedge funds of funds, especially by large public pension funds, industry insiders say.
Among the pension funds that hired their first consultants for specialist hedge fund and alternative investment assignments so far this year:
• The $49.5 billion Massachusetts Pension Reserves Investment Management Board, Boston, hired Cliffwater LLC in April.
• Trustees of the $76 billion Ohio Public Employees Retirement System, Columbus, hired Hewitt EnnisKnupp in April for alternative investments, including hedge funds, but also signed a contract with Cliffwater to provide non-discretionary operational due diligence for a new $1.2 billion direct investment program.
• Three of the five pension funds in the New York City Retirement Systems — the $24.3 billion police fund, the $7.9 billion fire fund and the $41.2 billion employees' retirement system — hired Aksia LLC in January.Succeeding
“In the last 18 months, a lot of the groundwork has been laid through intensive education for public and corporate pension plan trustees, and now, clients are beginning to implement their direct investment programs in hedge funds,” said Mary Bates, a senior hedge fund consultant in Hewitt EnnisKnupp's Chicago office.
Market observers said the pace of direct investment will accelerate further as more experienced hedge fund investors pump more money into hedge funds. For example, staff of the $109.1 billion Texas Teacher Retirement System of Texas, Austin, recently received legislative approval to double the hedge fund limit to 10% of plan assets. Texas Teachers' hedge fund assets totaled $4.06 billion as of March 31.
The $51.2 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, also increased its hedge fund target to 12% of plan assets from 10% in March; hedge fund assets totaled $4.92 billion as of March 31.
For advice on direct investments, Texas Teachers' investment staffers rely on specialist hedge fund consultant Albourne Partners; Pennsylvania Schools officials use Aksia.
A chosen few
A handful of sophisticated specialist consultants and a few general consultants are winning most of the new assignments as well as retaining existing clients or, increasingly, snatching clients away from each other, according to a review of reported searches and hires in Pensions & Investments' archives.
The top specialist alternative investment consultants include:
• Albourne Partners, which advised 202 clients on $230 billion in hedge fund investments as of May 31.
• Aksia, which advised 42 clients with $42 billion as of April 30 in hedge fund investments.
• Cliffwater, which provided customized consulting services to 27 clients with $19 billion invested in hedge funds as of May 31.
The Beryl Consulting Group LLC also offers clients both basic research and highly customized portfolio services.
General investment consulting firms with a reputation for robust hedge fund expertise include Cambridge Associates LLC, NEPC LLC, Hewitt EnnisKnupp, Rocaton Investment Advisors LLC and Fund Evaluation Group LLC.
Specialist hedge fund consultants are at “the leading edge of the phenomenon of many pension plans, especially public plans, moving to direct hedge fund investment,” said David Harmston, partner and global head of Albourne Partners' client group. Mr. Harmston is based in the London-based firm's Norwalk, Conn., office.
Each of the specialist consultants offers different services and specializations in combination, ranging from manager research and due diligence reports to highly customized portfolio construction, including manager selection as well as negotiation on fees and terms.
For larger funds, like Texas Teachers, Albourne Partners' in-depth, extensive research on hedge fund managers has served the fund well since 2005.
During a June 16 board meeting discussion about renewing the Albourne contract, Jerry Albright, deputy chief investment officer, told trustees: “I can't imagine running this portfolio without them. It would be devastating to lose Albourne.”
The Pennsylvania Schools fund is one relying on a more collaborative relationship with specialist consultants for hedge funds, private equity and real estate.
“We view our consultants as an extension of our investment staff,” said Alan Van Noord, chief investment officer. “It's like a basketball team: Our staffers are the starters, and the consultant is the sixth man, getting a lot of playing time.”
With an additional 2.3% or about $1.2 billion to put to work in new direct hedge fund investments under the fund's new asset allocation, Mr. Van Noord said Aksia and investment staff will gradually add new managers. The fund also is considering adding emerging hedge fund managers.