Assets invested or destined for hedge funds, funds of funds and their cousins absolute return and 130/30 strategies totaled $38.2 billion so far this year, 54% more than the $24.7 billion institutions invested in these approaches in all of 2006.
According to Pensions & Investments collation of reported searches and hires year-to-date through May 10, much of the big surge in allocations is due to the popularity of so-called active extension or short-enabled strategies such as 130/30 strategies.
Institutional investors globally have announced that they have hired or are searching for managers to handle nearly $7.4 billion in these approaches, a whopping 1,129% increase from the $600 million reported in all of 2006. In fact, the allocation to short-enabled strategies is probably much larger, as P&Is count only included announced searches with a definite portfolio size; many pension plan executives have not opened searches yet or revealed the size of the allocation.
The 130/30 strategies are a hot area, agreed Jeb Doggett, partner, at vendor consultant Casey Quirk & Associates LLC, Darien, Conn. Besides the reported searches, especially among public pension plans, many institutional investors are having dialogues out of the public eye with their current managers about moving from a traditionally managed account into an unconstrained version. The 130/30 managers mostly dont have long track records, so theres a lot of Gee, will you seed us? requests going out. There never really was a search, but money is being moved from existing accounts to these approaches, Mr. Doggett said.
P&Is review of 2007 search and hire activity found $28.3 billion earmarked for hedge funds and funds of funds. That total, as of May 10, is not far behind the $20.96 billion invested in all of 2006. Absolute-return mandates, many using hedge funds as the alpha generator, totaled $2.5 billion as of May 10, compared with $3.2 billion in 2006.
Mr. Doggett noted that P&Is growth estimate jibes with intelligence he and his colleagues are receiving from hedge fund and fund-of-funds managers about the continued and significant pace of institutional hedge fund investment. Many large pension plans that invested a small amount in hedge funds to get their feet wet now are increasing their allocations. An allocation of between 1% and 2% of assets is too insignificant to have a real impact on overall portfolio returns. This level of investment is almost meaningless, in fact, so more experienced plan sponsors are meaningfully raising their hedge fund allocations, Mr. Doggett said.
Some of the largest institutional investors still seeking hedge fund, 130/30 and absolute-return managers include:
cBlue Sky Group, Amsterdam, which manages $16.4 billion for the Amsterdam-based KLM Royal Dutch Airlines pension fund, will move $5.7 billion into 130/30 or 120/20 strategies from the plans passive global equity allocation;
cABP, Heerlen, Netherlands, increased the $271 billion pension plans hedge fund allocation to 5% from 3.5%, resulting in an additional $4.1 billion to be invested;
cDivision of Investment, State of New Jersey, Trenton, has about $2.5 billion of its $87 billion in pension assets to be invested in hedge funds, after increasing the allocation to the asset class to $4.5 billion from $2 billion;
cTeachers Retirement System of the State of Illinois, Springfield, may seek short-enabled managers for up to $1.6 billion of the $39 billion pension plan;
cCalifornia Public Employees Retirement System, Sacramento, will invest $1 billion of the $241.7 billion pension plan in emerging hedge funds of funds;
cPublic Employees Retirement System of Mississippi, Jackson set aside $1 billion of the $20.6 billion plan for a first-time investment in absolute-return strategies; and
cRailways Pension Trustee Co. Ltd., London, increased its hedge fund allocation to 8% from 5% of its $35.5 billion in pension assets, an increase of $1 billion.
In addition, an unidentified Dutch pension plan issued a search for a new $10.4 billion hedge fund of funds, according to European news reports. And the New York City Retirement Systems, with $100 billion in aggregate assets, will put $5 billion into play if each of its five pension plans makes a modest 5% initial allocation (P&I, Jan. 22).
Unilever PLC, London, plans to launch a Luxembourg-based pooled investment fund early next year to enable its worldwide pension plans which have assets totaling $24.53 billion to invest in hedge funds of funds. The U.K. pension plan is set to invest up to $400 million, or 5% of its $8.3 billion in pension assets, in hedge funds of funds.
The largest institutional hirings in the hedge fund area and for related alpha generation strategies so far this year include:
• Avon Pension Plan, Bristol, England, hired Man Group, Gottex, Signet Cap, Stenham Asset Management and Lyster Watson to manage a total of $399 million in hedge funds of funds;
• New Mexico Public Employees Retirement System, Santa Fe, hired managers for a total of $274 million in hedge fund-of-funds investments for the $11 billion plan; and
• The $13.2 billion Los Angeles Fire and Police Pension System allocated $90 million each to hedge fund-of-funds managers Aetos, Grosvenor Capital and K2 Advisors for a total of $270 million.
P&Is informal review also identified 16 large institutional investors that are reportedly considering new allocations to hedge funds and their brethren.
Some public plans such as the West Virginia Investment Management Board, Charleston, which oversees $8.9 billion of state retirement plan and other assets are gearing up to implement alternative investments after enabling legislation was passed by the state Legislature.
Institutional investors considering investments in 130/30 strategies include the $1.3 billion Marin County Employees Retirement Association, San Rafael, Calif.; the $15.5 billion Illinois State Universities Retirement System, Champaign; and the $4.5 billion Philadelphia Public Employees Retirement System.
And the $3.3 billion pension trust of Volkswagen AG, Wolfsburg, Germany, is also considering first-time allocations to specialty alternative investments, according to European news reports.