More pension fund chief investment officers are taking a close look at small hedge fund managers in an ever-widening search for diversified alpha sources.
Only a few large pension funds — the $230.1 billion California Public Employees' Retirement System and the $72.6 billion New Jersey Division of Investment among them — have made significant investments in small hedge funds in the last few years, and sources say the bulk of U.S. corporate and public pension funds have yet to make the move.
But given the performance potential of hedge funds of funds that invest in — and even seed — emerging managers long on talent but short on assets and track records, observers expect many larger, sophisticated pension funds to move into the space.
Sources also expect pension funds already investing in emerging hedge funds strategies to increase their allocations, as is the case with the New Jersey fund.
“We are seeing broad and significant interest in making increased allocations to emerging managers. Actual activity (i.e. funding) has been light, but we believe we are in the early innings,” Richard Quigley, global head of portfolio advisory at alternative investment consultant Albourne Partners Ltd., said in an e-mail. He is based in the firm's Rowayton, Conn., office.
One large Silicon Valley-based corporate pension fund went past the talking stage in mid-April with industry newcomer Busara Advisors LLC, New York. The pension fund put $150 million in a customized fund of funds investing exclusively in emerging minority- and woman-owned hedge fund companies. Busara opened in September 2010, and Joseph Schlater, Busara CEO, said the mandate is the company's first. He declined to name the client, citing a confidentiality agreement.