The Teachers' Retirement System of the State of Illinois, Springfield, more than doubled the hedge fund-of-funds assets managed by Grosvenor Capital Management LLC to $998 million, terminating K2 Advisors LLC.
The move is part of the $40.8 billion fund's ongoing restructuring of its $2.1 billion hedge fund portfolio to include more direct investments in hedge funds, just one of many moves trustees approved on Dec. 6.
Trustees also gave a nod to hiring risk management and investment performance systems providers; hiring a hedge fund consultant; committing additional assets to real estate and private equity funds and co-investments; "graduating' an emerging manager; conducting an asset/liability study next year; and possibly creating strategic partners for opportunistic credit. The board also ratified the sale of stakes in three private equity funds on the secondary market.
As part of a consolidation of hedge funds-of-funds assets, management of the $537 million that Stamford, Conn.-based K2 managed in a hedge fund-of-funds strategy will be assumed by Chicago-based Grosvenor. Grosvenor will merge the K2 portfolio into its own $461 million hedge fund-of-funds portfolio.
Greg Turk, director of investments, stressed to trustees at an investment committee meeting on Dec. 5 that K2's termination is the result of the portfolio reconstruction, not performance problems or organizational concerns.
“ Grosvenor has more resources and will be a better fit” with internal TRS hedge fund officials, Kenneth Musick, investment officer for hedge funds, told trustees.
Grosvenor's role within the new portfolio remains to be determined, R. Stanley Rupnik, chief investment officer, said in an interview. Its portfolio will be the source of at least some of the new direct hedge fund investments, he said. Illinois Teachers' hedge fund portfolio has a 46% allocation to hedge funds of funds.
The board hired Albourne Partners Ltd., London, as the system's first hedge fund consultant. It will provide manager research and selection advice as well as portfolio construction assistance.
Also hired were BlackRock (BLK) Inc. (BLK), New York, to provide the system's first risk management system, and Investment Metrics LLC, Darien, Conn., to provide its first performance measurement system.
In addition, TRS trustees approved a $100 million commitment to Blackstone Real Estate Partners Asia at the Dec. 6 meeting.
Strategic Global Advisors LLC, Newport Beach, Calif., was graduated from TRS' emerging managers program into the system's $9.2 billion international equity program. SGA eventually will run a full 2%, about $185 million, of the international stock portfolio. Initially, however, the firm will manage about $150 million because TRS policy forbids investments that exceed 20% of a manager's overall assets; SGA managed $562 million at the end of November.
SGA's original mandate was for active all-capitalization core international equities, but it will move to managing small- and large-cap core strategies within the larger portfolio.
The initial $50 million SGA was awarded as part of the system's emerging managers program in March 2011 will be put back into the $500 million pool, Kenyatta Matheny, senior investment officer and head of the program, told trustees.
Trustees also ratified the following co-investment commitments with existing private equity and real estate managers that staff made over the past six weeks:
n$40 million to life insurance investments managed by private equity manager MBK Partners LP, Hong Kong;
n$25 million to investments in U.S. regional shopping malls made by real estate manager Starwood Capital Group, Greenwich, Conn.;
n$20 million to health-care opportunities managed by private equity manager Madison Dearborn Partners LLC, Chicago; and
n$20 million to energy investments managed by natural resources-focused private equity manager Riverstone Holdings LLC, London.
Trustees also accepted Mr. Matheny's recommendation to ratify the sale of TRS' interest in three private equity funds — Technology Crossover Ventures VII, Thayer Equity V and CHS Private Equity V — on the secondary market. The sale netted a total of $121 million.
Mr. Rupnik told trustees that another $400 million of private equity secondary market sales were close to being completed. Trustees will receive details about the sales in February.
Trustees also heard about new research that fixed-income officers are conducting on strategic partnerships. Three of TRS' existing money managers were asked to create models for opportunistic, unconstrained, multiasset portfolios, Scottie Bevill, senior investment officer who oversees the fund's fixed-income portfolio, said at the Dec. 5 investment committee meeting. Mr. Bevill wouldn't identify the three, except to say they are “well-known names.”
Mr. Bevill told trustees that in an environment in which core fixed-income strategies are expected to return just 2.5% over the next four years, adding customized separate accounts that gave trusted money managers “flexibility and creativity” would likely result in higher returns.
“Flexibility can generate alpha,” Mr. Bevill said, adding that “a lot of interesting opportunities will be coming in the next three months.”
The three TRS managers were instructed to create a model portfolio “built to take advantage of distressed opportunities” globally. Managers may invest in any asset class, Mr. Bevill said, noting the portfolios will be designed to generate an absolute return.
The model portfolios target very low duration, low interest-rate risk and annualized returns of 8% (unleveraged) to 10% (moderate leverage), Mr. Bevill said.
Using a hybrid private equity vehicle, if TRS decides to go through with the idea, managers would call capital when needed. At least 50% of the assets in their individual portfolios must remain fairly liquid, he added.
Most important, Mr. Bevill said, is portfolio construction that includes very active participation by TRS staff. Monthly conference calls would be part of the relationships and investment discretion will be joint, said Mr. Rupnik.
Mr. Rupnik endorsed the strategic partnership concept, reminding trustees that “we already have most of the investments these partnerships will target in other parts of our portfolio.”
Mr. Bevill might come back to the board in February with hiring recommendations for opportunistic strategic partners.
Richard Ingram, executive director, told trustees that general investment consultant R.V. Kuhns & Associates Inc., Portland, Ore., will conduct an asset/liability study in 2014 to be completed before the June 30 end of the fund's fiscal year.
Finally, TRS returns trailed the fund's custom index in all periods except the 10 years ended Sept. 30, according to a performance report from R.V. Kuhns & Associates.
Returns (annualized for more than one year) as of Sept. 30 were year-to-date, 9.7% (index, 11%); one year, 12.6% (index, 13%); three years, 10.5% (index, 10.6%); five years, 7.3% (index, 7.7%); and 10-years, 7.4% (index, 7.4%). n
This article originally appeared in the December 9, 2013 print issue as, "Illinois drops K2 in funds-of-funds restructuring".