Institutional investment activity so far this year has shown a burst of speed, with renewed interest in hedge funds and funds of funds that began in earnest early last year but slowed markedly toward the end of 2010.
Industry pundits were almost right about 2010. Their prediction that the year would be a banner one for hedge fund investment was realized as institutional investors around the world invested or launched searches for a total of $32 billion, but their forecast that net hedge fund activity in 2010 would hit $49 billion fell well short.
The first half of 2010 showed strong net investment activity of $25 billion, but activity dropped to $6.9 billion between July and September.
Sources said many pension plan investment committees had to take long, deep breaths before making more hedge fund investments.
In fact, Colorado Fire & Police Pension Association, Greenwood Village, took its absolute-return investments down to zero in 2009 from 5%, because the 5-year-old program had a “portable alpha structure that was inappropriate,” said Scott Simon, CIO of the $3.1 billion system.
The fund set a new 11% absolute-target and restructured the allocation to invest about 70% in hedge funds and 30% in commodities.
The hedge fund part of the new portfolio was completed through the hire of fund-of-funds managers Aetos Capital Management LLC in March and GAM USA in February, Mr. Simon said. Aetos will manage $130 million in a long-short equity hedge fund-of-funds mandate. GAM USA was rehired to run $100 million in a global macro portfolio. GAM USA had managed a different hedge fund-of-funds strategy for Colorado fund as part of the now dismantled portable alpha program, Mr. Simon confirmed.
Pending approval from the board of trustees, Mr. Simon said he expects to hire a yet-to-be-named commodities fund of funds in April to run about $100 million, which will bring the system close to its target, Mr. Simon said.
Funding will come from reducing the pension fund's allocation to equities and fixed income. In an asset allocation change, the target for global equities was reduced to 45% from 58%, and fixed income was reduced to 20% from 27%. He said the new asset allocation model is “a bit more aggressive” than the system's targets prior to 2009.
After nearly six years of study, three of the five pension fund systems within the $113.4 billion New York City Retirement Systems finally made large first-time hedge fund investments last month.
All three funds have invested in hedge funds of funds managed by Permal Group, under what one anonymous source described as the “master plan” of Larry Schloss, CIO of the New York City Retirement Systems.
The first was the $23.1 billion New York City Police Pension Fund, which committed $150 million to Permal.Next to invest $250 million with Permal was the $39.6 billion New York City Employees Retirement System.Most recently, the $7.6 billion New York City Fire Department Pension Fund's board of trustees committed $50 million.
All three investments are subject to successful contract negotiations.
Mr. Schloss said in a news release about the police pension fund's investment that more hedge fund investments can be expected from the Big Apple's retirement systems, while noting that the Permal investment is “consistent with the long-term objectives of providing reliable returns, reducing investment volatility, and capitalizing on the changing market landscape.”
Reporters Timothy Inklebarger and Robert Steyer contributed to this story.