Texas Permanent School Fund, Austin, on the recommendation of its investment staff, is restructuring its $2.5 billion hedge fund portfolio to move from a fund-of-funds approach to direct investment through strategic partnerships.
The Permanent School Fund will review a process for selecting strategic partners for its $2.5 billion hedge fund portfolio during the Jan. 25-27 meeting of the Texas State Board of Education, which oversees the $22.8 billion fund on behalf of the Texas Education Agency, Austin.
Patricia Hardy, chairwoman of the committee on school finance/permanent school fund, told the board during a Nov. 18 meeting that committee members had directed Holland Timmins, the permanent fund's executive administrator and chief investment officer, and his staff to bring a proposal to the committee in January.
According to a webcast of the board meeting, Ms. Hardy said the permanent fund's finance committee likely will make recommendations for strategic hedge fund partners at the state Board of Education's April 18-20 meeting.
During a webcast of the finance committee's Nov. 16 meeting, Mr. Timmins suggested that some of the fund's five existing hedge fund-of-funds managers could be moved into strategic relationships, but in her report to the full board on Nov. 18, Ms. Hardy did not specify whether the selection process would be limited to existing managers or conducted via an open RFP.
Mr. Timmins said during the finance committee meeting that a move to strategic partnerships for direct investments in hedge funds would save the Permanent School Fund about $114 million in fees over the next five years, compared with the current all fund-of-funds program. The fund paid $72 million in hedge fund-of-funds fees since inception of the absolute-return portfolio four years ago, Mr. Timmins told the finance committee meeting.
The fund's five existing hedge fund-of-funds managers are Grosvenor Capital Management, which manages $770 million; Blackstone Alternative Asset Management, $637 million; K2 Advisors, $380 million; GAM USA, $328 million; and Mesirow Advanced Strategies, $317 million, according to an e-mail from Suzanne Marchman, spokeswoman for the Texas Education Agency.
The Permanent School Fund will begin a search early next year for a commodities manager to run up to half of the fund's 6% real return allocation in long-only or long/short commodity investments, about $685 million in current dollars. Earlier this year, the board gave permission for fund staff to internally manage the other 3% of the real-return allocation in Treasury inflation-protected securities.
Mr. Timmins told finance committee members during their Nov. 16 meeting that an RFP for the commodities search will be posted on the fund's website Jan. 26 and a manager will be selected in July.
Separately, the full board also approved commitments to two real estate funds, part of the expansion of the fund's $1.5 billion total allocation to the asset class. If approved by the full board, the fund will commit up to $75 million to TA Associates Realty Fund X, a value-oriented fund, and up to $50 million to Oaktree Real Estate Opportunities V Fund, an opportunistic fund.
The Permanent School Fund's real estate investments and commitments now total $830 million.
In other news from the Nov. 16 meeting webcast, the five state Board of Education members who serve on the PSF finance committee learned that both the $685 million internally managed TIPS allocation within the real return asset class and the fund's new risk parity allocation were fully funded in July.
The $1.8 billion risk parity allocation represents a 7% allocation within PSF's absolute-return asset class and is managed by AQR Capital Management LLC and Bridgewater LP, said Ms. Marchman in her e-mail.
Finance committee members also learned that as of Sept. 30, Texas Permanent Fund returned -9.34% for the quarter and 1.25% for one year, 4.7% for three years and 2.29% for five years. All returns are gross of fees and annualized for periods of more than one year.