ST. PAUL, Minn. - The $33.5 million Hamline University endowment hired Clifton Group Investment Management Co. to run a market-neutral enhanced cash portfolio, said Peter W. Lilienthal, vice president-finance and operations.
Hamline assigned Clifton $4.5 million, or nearly 15% of its total endowment fund.
Assets came from reducing an existing manager, Glenwood Trust Co., Chicago, to $4.5 million from $9 million, Mr. Lilienthal said. Glenwood Trust manages a fund of hedge funds for the endowment.
The endowment sought the Clifton alternative derivatives strategy because Glenwood Trust's performance has not generated returns as quickly as the university had expected, Mr. Lilienthal added.
"The worst year ever for us was 1994," said Ronald J. Surz, Glenwood vice president. "It was the first year we lost money. We were down 2%.
"We've had other of our clients concerned about 1994, but Hamline is the only one that really reduced us. If you look at 1994, bonds and stocks were flat; it was a pretty tough year for everybody."
Glenwood's objective is to lose no money over any 12-month period and to have expected returns of 15% per year, Mr. Surz said.
Through September of this year, Glenwood's performance has improved, earning an unannualized 10%, Mr. Surz noted.
The endowment switched to Clifton because it is trying to generate more returns to meet the university's four-year program to increase spending from the endowment, Mr. Lilienthal said.
The market-neutral strategy of the Minneapolis-based Clifton Group seeks a return of two to four percentage points a year above the annualized 90-day Treasury bill before management fees, said Mr. Lilienthal.
Clifton goes long, or buys stocks, and at the same time shorts, or sells, the option in the same company, eliminating market risk and creating a market-neutral position. Through a disciplined buy-and-sell strategy, the portfolio minimizes risk of a capital loss.
The strategy is designed to take advantage of occasional overpricing in options, an anomaly in options leading to the tendency for the option prices to revert to the mean, said Jay H. Strohmaier, Clifton vice president and director-sales and marketing.
How often options become overpriced depends on market volatility, he said. Over recent years, the overpricing has occurred infrequently because the market volatility has been low, even though stock market prices have gone steadily higher.
As a result, Clifton has invested on average only 48% of the portfolio in the long-stock/short-options strategy since it began the strategy for other clients in March 1991, Mr. Strohmaier said. The rest of the portfolio has been placed temporarily in money-market-type instruments, waiting for opportunities in the long-stock/short-options strategy.
For the Hamline endowment account, Clifton will put the uninvested part of the portfolio in a short-duration government portfolio, giving it a somewhat higher yield than a money-market fund.
Overall, since the inception of the strategy, the amount actually invested in the long-stock, short options strategy has ranged from 25% to 65% or 70% of the portfolio, Mr. Strohmaier said. It has returned since inception 270 basis points a year above the annualized 90-day Treasury bill rate before management fees, he added.
Clifton offers the strategy for both a fixed fee and performance-based fee, Mr. Strohmaier said. The fixed fee is 50 basis points; the performance fee is a 25 basis-point based rate plus 25% of the return above 25 basis points above the Treasury bill return.
Hamline is paying the performance-based fee, Mr. Lilienthal said.
"We've been able to achieve that return within the band of our objective from a low invested position," Mr. Strohmaier noted. "If we can get into a market of more volatility we'd expect even greater opportunities from options mispricings and we'd expect to do even better than we have."
Jeffrey Slocum & Associates, Minneapolis, assisted in the search for Clifton.
