Some very large institutional investors are tiptoeing into segregated hedge funds.
Dismayed by managers that last year locked up, gated, froze or otherwise restricted redemptions, institutional investors are actively investigating moves into hedge investment vehicles that guarantee liquidity and investor control over the investment.
John Godden, managing principal of MAG Consultancy, London, said his team is working on moving $63 billion of assets now invested in traditional commingled hedge funds into newly built segregated hedge fund portfolios.
What institutional investors are evaluating are special-purpose hedge fund vehicles in which the assets are managed either in dedicated accounts for a single large client or in a commingled fund with assets segregated by client.
Investors using segregated hedge funds, which are also called managed accounts, control every aspect of the relationship: the selection of the custodian, prime broker, risk management provider, money manager and investment strategy, said Rich Nuzum, president and global business leader of Mercer's New York-based investment management business. Because the investor owns the vehicle, it has the ability to fire the existing manager and hire a new one, he said.
With the segregated commingled hedge fund, investors have no control over the investment or the infrastructure, but they will receive complete holdings transparency, risk reporting and guaranteed liquidity, whether that is weekly, monthly, quarterly or some other time period that suits the liquidity of the underlying assets of the hedge fund.
Some institutions, like the $198.9 billion California Public Employees' Retirement System, Sacramento, might choose to build their own segregated hedge fund portfolios.
One such fund is the $83 billion Teacher Retirement System of Texas, Austin, which is “investigating hedge fund investing via separate accounts, judging the trade-off between the advantages ... and the costs (which include) operational complexity, the cost (legal fees and staff time) to negotiate investment management and counterparty agreements, and the increased back-office costs that have to be absorbed somewhere,” Howard Goldman, spokesman, wrote in an e-mail response to questions.
“We are also investigating the benefits of managed accounts - for instance. greater transparency - without changing the legal structure of our investments,” Mr. Goldman wrote.
Mr. Goldman said TRS staffers are in an information-gathering stage and have talked to separate account platform providers as well as the fund's existing hedge fund managers. No request for information has been issued and a search has not been conducted. Texas Teachers' hedge fund portfolio totals about $3.4 billion.
Other investors rumored to be considering setting up their own portfolios include the $200 billion China Investment Corp., Beijing; the $16 billion Utah Retirement Systems, Salt Lake City; and the C$87.4 billion (US$79.9 billion) Ontario Teachers' Pension Plan, Toronto. CIC officials could not be reached for comment.
Larry Powell, deputy chief investment officer of the Utah fund, did not return a call seeking information. Deborah Allan, Ontario Teachers' spokeswoman, said the fund does not disclose information about its hedge fund portfolio.