CHARLOTTESVILLE, Va. — The University of Virginia Investment Management Co., an institutional leader in hedge fund investment, is cutting its target allocation to the investment vehicles to 45% from 57.5%. But it might do so without taking a dime away from its current hedge fund allocation.
UVIMCO, which oversees the investment of endowment and operating funds for the University of Virginia, Charlottesville, might adopt portable alpha strategies that will enable the fund to maintain its high hedge fund allocation, but will shift some of the market exposure to equity strategies, said Christopher Brightman, UVIMCO's chief executive officer. UVIMCO oversees $2.6 billion of the university's $3.1 billion in endowment assets. All of the assets are externally managed.
The changes are a result of UVIMCO's first formal use of a risk budget. The overall goal is to raise the manager's target risk level to a 9% standard deviation from about 5% to 6% previously. Mr. Brightman expects to hike the target risk level by allocating 10% of assets to non-U.S. developed markets, where the fund has been absent for the past three years, and by increasing leverage in its hedge funds.
UVIMCO also has reduced its private equity target to 15% from 19.5%, reflecting its inability to reach the previous target. Real assets, comprising real estate and natural resources, gradually will rise to 5% from 3%, while fixed income will increase to 10% from 5%, including a new 2% allocation of total assets to high-yield bonds.
The change in the policy asset mix doesn't necessarily mean the endowment fund will yank 12.5% of assets — some $330 million — from its hedge fund managers, or that it will hire a bunch of international equity managers, "I don't expect our allocation to hedge funds to decline," Mr. Brightman said.
Instead, Mr. Brightman might turn to portable alpha strategies. This increasingly popular form of financial engineering allows an institutional investor to seek the best money managers, regardless of which asset classes they manage. The fund official can short the managers' market exposure, or beta, using derivatives or swaps and port the remaining alpha onto another asset class.