Texas Permanent to shift K2 assets in hedge fund portfolio review

Texas Permanent School Fund, Austin, is taking a second look at the construction of its $2.5 billion hedge fund portfolio while investment officials seek to negotiate lower fees from four of its five hedge funds-of-funds managers.

K2 Advisors, which managed $392 million for the educational endowment as of May 31, was terminated effective immediately as part of a motion approved by the Texas State Board of Education, which oversees management of the $24.4 billion endowment, according to a webcast of the board’s July 20 meeting.

K2’s assets will be moved to existing managers Blackstone Alternative Asset Management and Grosvenor Capital Management with the exact amounts to be determined by staff. Neither firm will receive less than one-third or more than two-thirds of the allocation, according to the motion.

Blackstone, which managed about $667 million as of May 31, and Grosvenor, which managed about $800 million as of the same date, were selected as absolute-return strategic relationship partners for the Permanent School Fund’s hedge fund portfolio at an April 20 board meeting.

The July 20 motion directed staff to try to negotiate reduced fees as well as to clarify terms and responsibilities with each of the four remaining hedge funds-of-funds managers running the PSF portfolio. In addition to Blackstone and Grosvenor, those managers are GAM USA, which as of May 31 managed about $327 million for the fund, and Mesirow Advanced Strategies, which managed about $330 million. Any new contracts issued for these managers must not exceed two years.

Additionally, investment officials were directed to extend the contracts of Blackstone, Grosvenor and Mesirow past their Aug. 31, 2012, expiration date for sufficient time to allow for renegotiation, according to the July 20 meeting webcast.

The full State Board of Education will ratify any contract changes with the remaining hedge funds-of-funds managers at its next meeting on Nov. 16, the motion concluded.

A reason was not provided for K2’s termination as part of the motion or in discussion by the Committee on School Finance/Permanent School Fund during its July 18 meeting webcast. Holland Timmins, PSF’s chief investment officer and executive administrator, could not be reached for clarification by press time. Renee Soto, a K2 spokeswoman, declined to comment.

There was “some confusion” over the strategic relationship partnerships discussed at the April 20 board meeting, Patricia Hardy, chairwoman of the Committee on Finance/Permanent School Fund, explained to other SBE commissioners during the July 20 board meeting, the webcast showed.

Nothing was “done about the funding” of the hedge fund strategic partnerships and “we did not do anything that would require the termination of the other hedge funds-of-funds managers,” Ms. Hardy said at the July 20 meeting.