Kentucky hires 3 hedge funds of funds to run $1.2 billion

Kentucky Retirement Systems, Frankfort, hired three hedge fund-of-funds managers to run a total of $1.2 billion, confirmed T.J. Carlson, chief investment officer of the $14.9 billion retirement system.

Blackstone Group, Pacific Alternative Asset Management and Prisma Capital Partners will manage $400 million each in the system's first investments in hedge funds of funds, Mr. Carlson said in a telephone interview.

The hires were approved at the system's Thursday meeting.

The new allocation is part of the system's new absolute-return asset class, which has a target allocation of 10%. The system reduced its domestic equity allocation to 20% from 30% in February to fund the allocation.

Along with two separate $50 million allocations to multistrategy manager Arrowhawk Capital Partners in early 2010, the system's absolute-return asset class is about 90% to 95% filled out, Mr. Carlson said.

He said the system does not plan to actively search for additional absolute-return investments in the near term but would consider investing in “compelling absolute-return ideas.”

The system does have a long-term goal over the next five to seven years to “build off these (hedge fund-of-funds) relationships and start doing some direct (hedge fund) investing.”

“The main reason (for the new absolute-return strategy) is to reduce volatility in the portfolio overall and reduce our dependence on U.S. equity-only,” he said. “Going forward, you're going to have to be more dynamic and more diversified to get our expected rate of return of 7.75%. Absolute return helps us maintain our expectations but lowers our risk.”

R.V. Kuhns, the system's general consultant, assisted.

The system also hired Columbia Asset Management and Loomis Sayles to each run $215 million in high-yield fixed income and Manulife Asset Management to run $140 million in global fixed income.

Mr. Carlson said that as part of the new asset allocation, the system changed its 20% allocation to core fixed income to 10% core, 5% opportunistic high-yield and 5% global fixed income. He said all three managers are opportunistic.