Mr. Stein said he and the investment team manage the U of C's $4.5 billion endowment to provide maximum support for the university's operating budget, without eroding purchasing power and with a reasonably stable spending stream. To accomplish this goal, the endowment staff must produce high returns generated by aggressive investment. Risk is tolerable, Mr. Stein said, as long as the fund is compensated for it. Mr. Stein and his team have translated "aggressive investment" into a 90% allocation to equities and a bare minimum (10%) fixed-income allocation.
About one-third of total fund assets are invested in hedge funds, which are expected to produce equity-like returns with lower volatility and have the added benefit of low correlation to other asset classes and each other, Mr. Stein told the conference audience. U of C hires its hedge fund managers with every intention of giving them more to manage over time.
What bothers other institutional investors — volatility and illiquidity — are risks the endowment can "afford to take because of our very long time horizon," Mr. Stein said. Long lockups or long horizons to realize returns are not usually an obstacle to investment, depending on the strategy, Mr. Stein said.
As a result, U of C staff receives a lot of "first phone calls" from new hedge fund managers of the type they like best — those whose strategies "don't fit into any asset classes," Mr. Stein said. The less related hedge fund managers are to their peers or any benchmark, the better, he noted. "We are really looking for idiosyncratic managers. We are looking for alpha anywhere but from traditional sources. We want portfolios with low correlation, including concentrated equity portfolios," Mr. Stein said. In fact, Mr. Stein said he especially likes one niche hedge fund manager that invests on an extremely long-term basis in health care companies in a concentrated portfolio, a strategy well outside the hedge funds normally considered by institutional investors.