For Colorado Fire & Police, the K2 specialty commodities hedge fund of funds adds diversification as the third and final component of the fund's absolute-return or hedge fund program, confirmed J. Scott Simon, chief investment officer.
Earlier this year, the system gave $100 million each to hedge fund-of-funds managers GAM and Aetos to manage in global macro and long/short equity strategies, respectively. “The commodities fund of funds will help balance the other two absolute-return approaches,” Mr. Simon said.
Industry observers said there is no good gauge of the size of institutional investment in commodities overall, or how much is invested through hedge fund and long-only strategies. But they agree that the pace of investment is quickening.
Mr. Hagegard said Greenwich Associates' annual survey of the 1,000 largest U.S. defined benefit plans saw a three-percentage-point gain in the number of executives saying they invest in commodities — to 15% as of June 30, 2010, up from 12% two years earlier.
“The public plans have been most active in stepping up their commodities investing as they are reaching for returns to meet their obligations since taxpayers are not inclined to further fund public pensions,” Mr. Hagegard said, noting that corporate plan executives, on the other hand, are derisking their defined benefit plans as part of asset-liability matching.
“Institutional interest is very strong. People we've been talking to for three years suddenly want to invest,” reported Michael S. Reeves, managing director at commodity specialist Vermillion Asset Management LLC, New York.
About 70% of the $2.2 billion Vermillion manages is from institutional investors. Half of the firm's assets are managed in an alpha-generating hedge fund strategy, Viridian Fund, while the rest is managed in its long-biased beta strategy, Celadon Commodities Fund.
Mr. Reeves said Vermillion opened in 2005 offering just the hedge fund strategy, but opened the beta fund at the request of an institutional client he wouldn't name that wanted long-only exposure. Unlike a 100% long-only commodities strategy, managers of the Celadon fund use various overlays to “mitigate volatility that definitely is present in the strategy,” Mr. Reeves said.
Reporters Douglas Appell, Timothy Inklebarger and Robert Steyer contributed to this story.