At the urging of its corporate pension fund clients, Blackstone Alternative Asset Management, New York, is adding a fourth fund to its current mix.
Carrie McCabe, president and chief executive officer of BAAM, which has $1.3 billion under management in its funds, said the new fund will take an international approach. She said clients "would like a different way to do international investing and get a return that is not correlated with the equity markets."
Corporate pension fund interest in hedge funds is growing, said Ms. McCabe, who recently met "with (representatives of) one of the two largest corporate pension funds in the U.S."
Although Ms. McCabe would not identify them, according to Pensions & Investments data that would be the fund of either General Motors Corp. or General Electric Co.
Five pension funds from companies in the Fortune 100 have investments in BAAM's funds, Ms. McCabe said. One of those clients, RJR Nabisco Holdings Inc., invested in a fund in 1994. Now that the firm has been split into two companies, the two new pension funds have continued the investment.
BAAM uses about 40 hedge fund managers in its three investment funds. "We mix and balance different managers to achieve genuine diversity of the investment styles, philosophies and markets -- as well as low overall expected correlation to traditional long-only asset classes," she said.
The largest fund is the Blackstone Partners Investment Fund, which is "the company's flagship fund and the most diversified," she said. The fund holds more than one-third of BAAM's total assets and has a variety of equity and fixed-income investments and relatively low volatility.
The Blackstone Park Avenue Fund has more volatility and uses macromanagers and sector-specific managers.
The Blackstone Event Driven Fund uses merger arbitrage managers, who have had many deals to work with given the record merger and acquisition activity in the United States in the past year. Ms. McCabe expects M&A activity to become stronger in Europe this year as well.
She sees strengthening markets throughout Europe as being part of the core strategy for the new international fund, which will invest in Europe and Asia.
She expects a high-yield corporate bond market to develop in Europe as more companies turn away from bank borrowing and to the capital markets. An increase in demand for high-yield bonds will cause yields to fall, she said.
She also expects privatizations to increase, providing more stock for the equity markets.
BAAM already has added European managers to its three current funds.
The Partners fund total return for the first six months of 1999 was 8.25%; for all of 1998, the fund returned 5.9%. This is much lower than its target, but the average return of all funds of funds for 1998 was -0.73%, according to Tass Investment Research Ltd., London. In the first six months of 1999, the average fund of funds returned 8.32%, according to Tass.
As one client, Ed Robertiello, said: "1998 was a very difficult year."
Mr. Robertiello, who oversees the $2 billion R.J. Reynolds Tobacco Co. and $1.5 billion Nabisco Inc. pension funds, said he's pleased with the results RJR has had since it made its investment, which now totals $30 million, in Partners. "We've had an annualized return of almost 12%."
The returns of the Park Avenue and Event Driven funds follow closely those of the Partners Fund, said sources close to the firm, although specific numbers were not available.
The manager selection and monitoring at BAAM involves "rigorous analysis," Ms. McCabe said.
"Once we make our asset allocation, we choose the hedge fund managers with which to best express our asset allocation views," she said.
"If you get much above eight to 12 managers in a fund, you don't get much from the added diversity," Ms. McCabe said. However, she emphasized the importance of diversity "because at any time a style could be out of favor."
The process starts with the selection of a "core of five managers," whose returns have lower volatility.
Then more specific style managers are selected.
For example, in the fixed-income area the mix of managers includes one Fed watcher, one global fixed-income arbitrage manager, one manager that uses the short end of the fixed-income market for currency trading and one manager that uses futures.
BAAM executives spend more than 100 hours on average with each new manager prior to allocating money. They interview an average of two to three new hedge fund managers every week.