Institutional investors are continuing a significant shift into long/short equity and fixed-income hedge funds.
More than $2.5 billion was allocated to these strategies, according to the searches and hirings tracked by Pensions & Investments, and more than that is slated to be invested in 2012 and beyond.
Both long/short equity and credit managers have been recipients of reasonably strong inflows as institutions, especially public pension plans, build their hedge fund portfolios with big weightings to strategies that promise to control volatility and generate alpha on both the long and short side of the portfolio.
In addition, pension funds are continuing to incorporate long/ short hedge fund strategies into their overall global equity and fixed-income portfolios, rather than keeping hedge funds segregated in a separate asset class.
Institutions that invested directly in long/short hedge funds from 2011 on include the $3 billion Colorado Fire & Police Pension Association, Greenwood Village; the $126.3 billion Florida State Board of Administration, Tallahassee; the $36 billion Illinois Teachers' Retirement System, Springfield; and the $83.3 billion State of Wisconsin Investment Board, Madison.
Among pension funds planning to add a long/short equity hedge fund allocation to their global equity portfolio is the $71.8 billion North Carolina Retirement Systems, Raleigh.
The pension fund received legislative authority in 2011 to allocate a maximum of 6.5% of plan assets to equity hedge fund strategies. The system already has about $2.4 billion invested in non-equity hedge fund strategies that will remain separate from the new investments.
The system's investment staff aims to invest between 3% and 5% of plan assets or as much as $4 billion in current dollars, mostly in long/short equity strategies over the next three to five years, said Julia A. Vail, a spokeswoman for the system, in an e-mail. The equity hedge fund investments will be used to reduce risk throughout the global equity portfolio, rather than kept as a separate hedge fund allocation.
Among the long/short equity managers that brought in a lot of new institutional business in 2011 were Ascend Capital LLC, Davidson Kempner Capital Management LLC, Elliott Associates LP and Highline Capital Management LLC. On the credit side, the list would include Anchorage Advisors LLC, BlueMountain Capital Management LLC, Claren Road Asset Management LLC and King Street Capital Management LLC (P&I, Jan. 9).
The push of institutional money into long/short equity funds comes despite what David McMillan calls “disappointing” performance in 2011. Mr. McMillan, the St. Louis-based director of hedge funds for Mercer Investment Consulting, said the performance was the result of volatility spikes throughout the year and very high correlations among equity securities, especially in August and September.
In aggregate, long/short equity hedge funds were down 8.3% in the year ended Dec. 31, as gauged by the HFRI Equity Hedge Fund index. The annualized return of the index over the three-year span was much better at 8.01%, but returns over the five-year period were flat at 0.45%.
Long/short fixed-income hedge funds were better able to handle similarly high correlations among fixed-income securities in the fall of 2011, Mr. McMillan said.