NEW YORK -- While some hedge fund managers are concerned too much transparency could be bad for their funds, the people who run CDC Investment Management have no problem with it.
"You have to have transparency on a portfolio level to see how our portfolios affect the rest of (a client's) portfolio," said Jon Lukomnik, managing director of CDC, which runs a complex of hedge funds.
"Institutional investors have an obligation not just to choose the highest return (investment) but to know what they're investing in," said Mr. Lukomnik, who joined CDC in 1998 after serving as deputy comptroller for pensions of the then $80 billion New York City Retirement Systems.
"We have the philosophy that we're partners with our clients and want to update them with whatever they need as often as they need it," said Bluford Putnam, president.
CDC refers to its method of making investment information readily available to clients as a "crystal box" instead of the "black box."
Transparency 'essential'
Waite Rawls, chief operating officer of Ferrell Capital Management, a fund of funds based in Greenwich, Conn., which invests in a CDC fund, said, "full transparency is essential to us. We won't make an investment without it."
He said that given the events of a year ago with Long-Term Capital Management LP, "I'm surprised more investors are not being more insistent about transparency."
The normal package CDC provides to its clients is a monthly report that offers full accounting of positions and net asset value. But the firm will standardize reports to suit a client's needs.
"There are some clients who require weekly reports and we provide them," said Mr. Lukomnik. "We want our clients to be able to integrate our portfolio with the rest of their investments."
Separate accounts
Moreover, the firm also runs some separate accounts for which investors have access to portfolio information on a real-time basis through their custodians.
CDC is a subsidiary of Caisse des depots et Consignations of Paris. It was created in 1990 and at first just did proprietary trading. In 1996 the firm decided to become a third-party investment manager, focusing on offering investments for financial institutions, including banks and insurance companies, pension funds and endowments.
It uses six basic strategies and offers more than 20 different fund products to its clients. There are two different mortgage securities strategies; emerging markets; global dynamic asset allocation; U.S. equities; and a U.S. corporate credit strategy.
The firm has about $900 million in new money so far this year. Through July 1, assets under management went to $4.4 billion from $3.5 billion.
CDC is also venturing into mutual funds. It started three mutual funds it hopes to market to 401(k) and other defined contribution plans.
"In the mutual fund world you get in data bases that get more attention," said Mr. Putnam. "I feel we can do well (running mutual funds) and this could help our separate account business."
Moreover, "I want to assure people that we are committed to being a transparent manager. These funds will have their daily net asset values in the newspaper," he added. "It will show people how our strategies are doing."
Hopes to attract billions
The firm hopes to attract between $3 billion and $5 billion for its mutual funds in the next five years.
The three different investment styles being used for the mutual funds are based on the strategies of three CDC hedge fund portfolios.
The first fund is not really a hedge fund, but it does follow one of the strategies CDC offers to its institutional clients. It is a basic, large-cap equity fund that doesn't use leverage, according to Mr. Putnam. "It's a straight competitor to normal large-cap funds," he said.
"There are lots of people who want that," he said. "The United States is a culture of stock pickers and equity buyers."
The fund relates to the CDC U.S. Core Equity Composite fund, which was up 28.9% from its inception on Jan. 5, 1998, through Dec. 31, the latest figures available.
The other two funds involve what Mr. Putnam termed "bells and whistles."
One is an aggressive equity fund, whose benchmark is the Standard & Poor's 500 Index. Mr. Putnam said it will earn an extra return over the S&P 500 through the use of a global asset allocation process.
This process will involve using a long-short futures portfolio and a foreign currency portfolio overlay on top of the U.S. equity portfolio.
Road to international
"It's a superior way to get international exposure," rather than buying international equities, said Mr. Putnam.
This fund relates to the CDC Benchmark Series Plus -- U.S. Equity Composite fund, which had a 10.53% return from its inception on July 1, 1998, through Dec. 31, 1998.
The third mutual fund is "a clone of our global balanced fund," said Mr. Putman. It is a market-neutral fund and designed to earn a return of 16% to 17% "no matter what happens in the equity market," he said.
"It uses all kinds of different instruments. The key thing is it gets to market-neutral exposure," added Mr. Putnam.
This fund relates to the CDC Global Balanced Hedge Fund Composite, which was up 17.76% for all of 1998.re pension fund managers who won't use these types of funds.
William Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, which runs American Airlines' $11 billion pension fund, including $5.7 billion in defined contribution assets, said, "I don't think we'd offer it to our 401(k) plan participants."
He added, "these are highly complex investment vehicles," that he thinks are too risky for 401(k) plan investors.
American's defined benefit plan has investments in private equity but not in hedge funds.
Response to critics
But Mr. Putnam has a ready response for critics. "We've had an incredible run in the equity markets and (young) people must know in their lifetime it will come to an end," he said.
"The last 20 years were unique," he added. "You should put a small part of your portfolio in a strategy that will do well if the rest of the world doesn't do well."
He even goes so far as to say, "(fund managers) are taking a large fiduciary risk by not offering plan members a way to help their portfolios if the market goes down."
"Plans that don't offer (these types of investments) will be at more fiduciary risk than other plans."
Mr. Putnam expects the large growth in the mutual fund assets will come after 2001, when the company has a three-year track record to show consultants who advise pension funds.
