Aurora darkened by direct investing push

Aurora Investment Management LLC's assets under management in hedge funds of funds have declined precipitously, the victim — to some extent — of asset owners' decided preference for investing directly in hedge funds.

Aurora had assets under management of $6 billion as of Sept. 30, sources said, a drop of 22.1% in six months.

Over longer time periods, losses are more profound: As of Sept. 30, Aurora's assets had fallen 57.7% from a peak of $14.2 billion on June 30, 2008.

Roxanne M. Martino, partner and Aurora's CEO, said the Chicago-based firm's assets were $7 billion as of Aug. 31 and did not address the sources' estimate of a $1 billion slide during September.

“Industry trends are affecting us, too,” Ms. Martino said during an interview in her office, pointing to the large movement of institutions to direct hedge fund investment, consultants having become more knowledgeable and adept about hedge manager selection, and the rise of family offices with big enough asset pools to justify hiring an internal hedge fund investment officer.

Exactly why Aurora has lost so much money — performance has been adequate — is not clear, sources said.

“Aurora is in a strong position, with significant assets under management,” Ms. Martino said, noting the firm has 1,300 clients and stressing that “we started the business 28 years ago with family office and high-net-worth individuals and those clients are still with us.”

Ms. Martino would not comment on client departures, but confirmed news from industry sources that an investment consultant had changed its recommendation on Aurora and that some clients had redeemed.

“One of our long-term consultant relationships is currently recommending diversifying (hedge) funds of funds and we have been affected by this reassessment. It has been a strong, good relationship for many years. We continue to be actively engaged with the consultant,” Ms. Martino said in an e-mail response to questions while traveling outside the U.S. for business.

Ms. Martino did not identify the consultant.

Aurora has long been considered by industry insiders to be among the upper echelon of large, pure-play U.S. hedge funds-of-funds managers specializing in serving a mostly institutional investor base.

But unlike Aurora, most of the rest of this small group have experienced positive growth over roughly the same time period, despite the headwinds Ms. Martino described.

In the seven years ended June 30, for example, EnTrust Capital Management LP experienced growth of 196.7% to $12.5 billion; Blackstone Alternative Asset Management was up 118.4% to $67.3 billion; The Rock Creek Group LP rose 118% to $10.9 billion; KKR Prisma's assets increased 110% to $10.5 billion; and Aetos Alternatives Management LLC swelled 63.3% to $10.9 billion.

Only two other firms in the cadre of top U.S. hedge funds-of-funds managers experienced declines over the same period: Mesirow Advanced Strategies Inc.'s AUM fell 14.4% to $14.2 billion while Pacific Alternative Asset Management Co.'s assets slid 11.6% to $9.6 billion.

Aurora's performance has been a contributing factor to redemptions, sources said.

It's not bad, judging from returns of one of Aurora's largest investors, the $35.6 billion Illinois Municipal Retirement Fund, Oakbrook.

But it's not great, either.

As of July 31, Aurora produced annualized returns for IMRF of 5.3% for 12 months, (compared to the HFRI Fund of Funds Composite index at 4.6%); three years, 6.5% (6%); five years, 4.6% (4%); and 10 years, 4.3% (3%), according to a performance report on the retirement fund's website. Ms. Martino said IMRF's returns are “a good proxy” for Aurora's returns overall.

IMRF had about $400 million invested with the company as of Sept. 1, about $126 million of which is managed in minority-, women- and disabled-owned hedge funds.

A hedge fund executive who knows the firm and spoke on condition of anonymity, noted that at a time when other hedge funds-of-funds managers have been doing pretty well, returning near 9% per year, Aurora's returns haven't been close to that. The source said Aurora's returns generally tend to be closer to those of major indexes, such as the HFRI Fund of Funds Composite, which is managed by Hedge Fund Research Inc.

As much as institutional investors appreciate the non-correlated return stream, downside protection and volatility control of their hedge fund investments, they still want these allocations to capture more — not necessarily a lot more — upside return.

“Every time you have a conversation with a client and look over the portfolio, they stop at Aurora, point a finger at its returns and say, "I wish we could get a little more return out of this part of our portfolio,'” said an investment consultant who asked not to be named.

Part of the problem is that Aurora has had a fairly hefty 7% volatility hedge in place since the financial crisis of 2008 that “really is a drag on performance,” the consultant said.

To the consultant's point, the Akron Community Foundation hired Aurora and another hedge funds-of-funds manager in 2010 specifically “to be a negatively correlated investment in our portfolio,” protecting the fund from drawdowns deeper than 6% to 7%, said Steven Schloenbach, chief financial officer and senior vice president.

While the $190 million foundation and its investment committee remain committed to the downside protection the hedge funds of funds offer, they've had to steel themselves for a loss of almost one percentage point of upside potential, Mr. Schloenbach said.

“We're going to stick with it because we'll be glad of the protection if the market suffers a steep decline, but it is a little hard,” he acknowledged. The Akron Foundation had $6 million invested with Aurora as of Aug. 31.

Investment consultants said such a large decline in assets as experienced by Aurora is of concern to asset owners because the smaller asset pool, the less able the firm might be to maintain its staffing levels, systems and reporting standards.

“As assets shrink, the economics of staying in business requires the fund-of-funds manager to concentrate its resources,” said another consultant, who spoke on condition of anonymity.

“If assets fall below a level that permits the firm to pay bonuses, it's going to result in people walking out the door,” the source said. n