NEW YORK - Dutch pension heavyweight ABP has a e1.25 billion hole burning in its pocket.
It wants to spend that money - this year - with U.S.-based hedge fund managers, and by 2005 it hopes to have invested a further e2 billion to e2.5 billion in this way.
Up to half of this new money is likely to go directly to individual hedge funds; the pension plan's previous vehicle of choice has been funds of funds.
The e1.25 billion targeted for 2003 comes on top of another e1.25 billion that Stichting Pensioenfonds ABP already has put into hedge funds since its April 2002 announcement of its intention to invest in the asset class, said Jelle Mensonides, chief investment officer, alternative investments at the Heerlen, Netherlands-based fund.
Around e1 billion is split among five fund-of-funds managers and the balance invested directly with four individual hedge fund firms. Mr. Mensonides would identify the firms.
So serious is ABP about putting money into absolute return strategies that late last year it shifted its entire hedge fund operation to its Third Avenue office in New York from its investment headquarters at Schiphol Airport, Amsterdam.
Moving the hedge fund team to New York will enable it to rummage around for new managers in what Mr. Mensonides considers the heart of the industry.
ABP needs to hire hedge fund specialists able to select and monitor the managers it invests with directly, and the United States holds the best recruitment opportunity, he said.
The New York hedge fund business shares back-office and legal resources with ABP's corporate bonds operation, which has been based there since 1999.
Reporting to Tom Dunn and Ira Handler, co-heads of the hedge fund team, are five investment professionals, who will be joined by two senior analysts once the hiring process is complete.
Although most of ABP's hedge fund exposure is through funds of funds, Mr. Mensonides hopes within the next few years to have around 40% of the portfolio managed directly by specialist managers.
Fund-of-funds strategies give the plan better access to hedge fund managers, but that is not entirely satisfactory. "In general we like to see specialist managers directly, but it takes more time," he said.
Although the plan has earmarked up to e5 billion for investment in hedge funds, its focus will be primarily on generating returns rather than ensuring the full amount is invested. "The first priority is to have an alpha-generating capacity. It's not a volume issue, but an alpha issue," said Mr. Mensonides.
ABP seeks from its hedge fund managers a risk-adjusted return of 300 to 700 basis points above LIBOR and an investment strategy with a low correlation to the ABP's core portfolio.
Investment strategies are subdivided according to risk profile. So-called "high octane" strategies are opportunistic and depend on immediate market conditions, said Mr. Mensonides. Distressed debt looks like an attractive area at the moment, he added. "Low octane" are somewhat more humdrum positions seeking returns through stable income, he added, giving arbitrage strategies as an example. The idea is to give up some extra return potential in order to reduce the risk of being stung by market events or liquidity squeezes. Mr. Mensonides hopes this strategy can offset the "high octane" positions.
Mr. Mensonides drew a sharp distinction between ABP's investment approach and what he calls the hot money, which typically is invested for a few months at a time. He said the firm has a longer-term view of the market, with an investment horizon of one to three years.
"But that does not mean we will not be monitoring our managers. And when we see style drifts or a manager not paying attention to the strategies, we will redeem our money," he added. n