AUSTIN, Texas - With its $175 million investment last month in Protege Partners Fund Ltd., New York, the University of Texas Investment Management Co., Austin, joined two exclusive groups.
The first is pension funds, endowments and foundations with $1 billion or more invested in hedge fund, or absolute return, strategies. Others in the group include Harvard, Yale and Stanford universities, the California Public Employees' Retirement System and the Pennsylvania State Employees' Retirement System. The second is large university endowments with hedge fund of funds investments. That group numbers exactly one - UTIMCO - and isn't likely to get bigger anytime soon, consultants and endowment officials say.
That UTIMCO appears comfortable in such rare company can be attributed at least in part to the arrival a year ago of Robert L. Boldt, who replaced Thomas G. Ricks as president, chief executive officer and chief investment officer of the management company, which oversees $14 billion in total assets and roughly $10 billion in university endowment assets.
Mr. Boldt was the man behind the original hedge fund investment strategy adopted by the $131 billion CalPERS fund, based in Sacramento.
Cathy Iberg, UTIMCO's deputy CIO and head of marketable alternatives, said Mr. Boldt brought with him ideas about leveraging the university's reputation as an investor and trying new strategies. Those ideas led to the Protege fund of funds investment. Protege's partners invest in new and emerging hedge fund managers, and negotiate for future capacity and a share of the hedge fund managers' profits. They then pass a portion of those profits along to Protege's own investors.
But, Mr. Boldt cautioned, the Protege investment is not necessarily a sign that UTIMCO will embark on any kind of broader fund of funds investment strategy. It might well have been a one-time deal, he said, a product of the combination of his ideas, his relationship with Protege President and Chief Executive Officer Jeff Tarrant and Protege's investment strategy.
Mr. Boldt said he has known Mr. Tarrant for years and respects his experience.
"They're not like a typical fund of funds," Mr. Boldt said of Protege. "And we're not interested in them because they are a fund of funds, but because of Jeff and the format he's put together there."
Looking to the future
Protege's concentration on new and emerging hedge fund managers also might be an opportunity for UTIMCO to identify hedge fund managers with which the endowment may want to invest directly in the future, Mr. Boldt said. Protege will negotiate for future capacity with the managers in which it invests; whatever capacity Protege does not use may be available to UTIMCO, Mr. Boldt said.
UTIMCO plans to add more hedge fund investments. The endowment now invests about 16% of its assets with eight individual hedge fund managers and the Protege fund of funds. The goal is to increase the hedge fund allocation to 25%. Ms. Iberg said the additional money most likely would go to individual hedge fund managers, unless another unique fund of funds opportunity arises.
That line of thinking is not uncommon at the largest endowments. The University of Texas System was the country's third-largest endowment as of June 30, 2002, according to an annual study by the National Association of College and University Business Officers, Washington. Harvard University, Boston, was the largest, with assets of $17.2 billion, followed by Yale University, New Haven, Conn. with $10.5 billion. Princeton University, Princeton, N.J., and Stanford University, Menlo Park, Calif., rounded out the top five with $8.3 billion and $7.6 billion, respectively, according to the NACUBO study.
That same study showed that endowments with more than $1 billion in assets allocated an average of 17.8% of their assets to hedge funds.
Harvard's endowment invests 6% of its assets, or about $1.2 billion, in a handful of outside hedge funds, most of whose executives at one time worked at Harvard Management Co., said Jack R. Meyer, chief executive officer of Harvard Management, which manages the endowment's assets. But the endowment has much more money than that in hedging strategies, Mr. Meyer said.
Money managers at Harvard Management also short equities internally, Mr. Meyer said.
"(The 6% figure) is accurate in terms of external managers, but in terms of overall exposure it's misleading," Mr. Meyer said. "Across all of our asset classes, we attempt to add value by going long securities we think are underpriced and short those that we think are overpriced. This is a hedge-fund-type of activity. There's really no way to quantify the amount of money involved in hedged strategies."
Mr. Meyer said he has not heard of many other large endowments using funds of funds, and Harvard has no plans to use them.
In its fiscal year 2002 financial report, Yale University reported 27% of its assets, or about $2.8 billion, in absolute return, or hedge fund strategies. That is up from 23% as of June 30, 2001. It was the largest single asset class in the endowment. The target allocation to absolute return strategies was 25% as of June 2002, up from 22.5% a year earlier, according to the report. Officials at the endowment did not return calls for comment.
In its report, Yale officials said they expected the absolute return strategies to generate returns of 6% with risk of between 10% and 15%, depending on the strategy being followed. Over the past 10 years, the absolute return part of the portfolio returned 12% with close to zero correlation to domestic equity and fixed-income markets, according to the report.
The $20.3 billion Pennsylvania State Employees' Retirement System, Harrisburg, has $2.5 billion, or about 12% of its assets, in fund of funds run by Blackstone Alternative Asset Management, New York; Pacific Alternative Asset Management Co., Irvine, Calif.; Morgan Stanley Alternative Investment Partners, New York; and Mesirow Advanced Strategies Inc., Chicago.
CalPERS has committed to investing $1 billion in hedge fund strategies, and roughly $700 million has been invested so far with more than a dozen individual hedge fund managers.