Following a more typical pattern for hedge fund-of-funds investors, the $76 billion Ohio Public Employees Retirement System, Columbus, in June said it will make $1.2 billion of first direct investments in single and multistrategy hedge funds, confirmed Michael Pramik, spokesman.
The system hired specialist hedge fund consultant Cliffwater LLC to provide due diligence and manager recommendations to staff on a non-discretionary basis.
About 40% or $800 million of plan assets have been designated for hedge funds of funds, with Prisma Capital and K2 Advisors LLC each managing $250 million.
New and experienced institutional investors are more comfortable investing directly in hedge funds either with the assistance of a specialist hedge fund consultant or through a customized hedge fund portfolio managed by a hedge fund-of-funds manager thanks to the lessons of the recent past.
“We're at an inflection point in the pension fund space where we're seeing a significant step increase in the acceptance of alternative investments, specifically hedge funds,” said Matthew B. Botein, managing director and head of BlackRock Alternative Investors, a division of BlackRock Inc. Mr. Botein is based in BlackRock's Boston office.
“Hedge funds survived a pretty great challenge” during the financial crisis in 2008 and did their job of minimizing the degree of market-related losses at the time and “have earned an important place in pension portfolios,” Mr. Botein said.
Like many hedge fund investors, Kentucky Retirement System is looking to better control volatility and to pump up portfolio returns.
“The main reason (for the new hedge fund strategy) is to reduce volatility in the portfolio overall” and to reduce the plan's dependence on U.S. equities, said Mr. Carlson. “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.”
“All investors are smarter after 2008 and the way that hedge funds performed then gives institutional investors far more comfort and trust going forward,” said David J. McMillan, partner and director of hedge funds in the St. Louis office of Mercer Investment Consulting.
The subsequent “institutionalization” many hedge fund companies undertook after 2008 to court pension fund investments to replenish their diminished assets, took the form of improved portfolio transparency, fairer investment terms and development of robust risk management and reporting systems, among other investor-friendly actions, has been “reassuring” to institutional investors, Mr. McMillan said.
“Many new investors, especially those with large allocations, are comfortable now with their expectations for hedge funds and also recognize that they have the buying power to make direct investments with the assistance of their consultant or with a customized portfolio built by a hedge funds-of-funds manager,” Stratford Advisory's Ms. Dermott said.
The driver to direct investment in hedge funds comes from the “desire for more customization that builds a portfolio that's oriented to meet the risk and return needs of the individual pension plan and the control that it offers,” she added.
Reporters Timothy Inklebarger and Arleen Jacobius contributed to this story.