Texas Teacher Retirement System, Austin, is in the process of building out a new 5% allocation — $5.5 billion in current dollars — to directional hedge funds to bring the $109 billion fund up to its 9% hedge fund target.
Last year, the state Legislature approved an increase in the $109 billion system's hedge fund cap to 10% from 5%.
The fund is maintaining its existing 4% allocation — about $4.4 billion in current dollars – that is invested in “stable value” or conservatively managed hedge funds, according to an annual review of external public markets investments presented to the TRS board on Sept. 15 by Dale West, senior director.
As part of building the directional hedge fund portfolio, the system invested a total of $1.3 billion in six hedge funds between Sept. 30 and Feb. 1, confirmed spokeswoman Juliana Fernandez Helton in an e-mail.
On Feb. 1, the Texas fund invested $250 million each in risk parity funds Bridgewater All-Weather II and AQR Group 10 Offshore. The hedge fund managers are Bridgewater Associates and AQR Capital Management, respectively.
Between Sept. 30 and Dec. 31, the Texas fund's made direct investments in the following hedge funds: $400 million in AQR Delta Offshore Fund, a managed futures fund run by AQR Capital Management; $160 million in Graham Global Investment Fund, a managed futures fund run by Graham Capital Management; $150 million in Starboard Value and Opportunity Fund, an activist fund managed by Starboard Value; and $100 million in Reservoir Strategic Partners Fund, an incubator hedge fund managed by Reservoir Capital Group.
Investment staff will make direct investments in a total of 12 hedge funds that are “more market sensitive and directional” by the end of the third quarter, according to the slide presentation Mr. West gave to the TRS board.
Funding for the new directional hedge fund investments will come from reductions in the fund's small-cap equity and U.S. Treasury allocations, according to Mr. West's presentation.