Another large first-time allocation to hedge funds of funds was made in October by Illinois State Universities Retirement System, Champaign. Investment staff there hired Pacific Alternative Asset Management Co. and KKR Prisma to split management of $500 million for SURS' $15.9 billion defined benefit plan.
“Direct investors in hedge funds currently are getting hedge fund-of-funds-like returns. It might be better and simpler just to use a hedge fund of funds,” said James C. McKee, senior vice president and director of hedge fund research, Callan Associates Inc., San Francisco.
“It's easy to build up (an internally managed) hedge fund-of-funds portfolio in a relatively benign environment, but in a tough market like the one we're in now, managing that portfolio will require a lot more resources than most institutions likely budgeted for,” Mr. McKee stressed.
Among other institutions that have turned to or are searching for a variety of hedge fund portfolio solutions from hedge funds-of-funds managers:
nThe $3.9 billion Fresno County (Calif.) Employees' Retirement Association is expanding its relationship with Grosvenor Capital Management LP, moving its current $156 million investment from a commingled hedge fund-of-funds and splitting it between a customized separate account managed by Grosvenor and a portfolio of direct investments in hedge funds on which the money manager will advise.
nPlymouth County (Mass.) Retirement Association is considering increasing its allocation to hedge funds by $10 million to $20 million from the current $25 million and is searching for at least one more hedge funds-of-funds manager. The $830 million pension fund splits the existing allocation evenly between Aetos Alternatives Management LLC and ABS Investment Management LLC.
nThe $47 billion Los Angeles County Employees Retirement Association, Pasadena, increased its hedge fund allocation to 5% from 3% of plan assets for 2016. LACERA will increase the allocations of existing hedge funds-of-funds managers Grosvenor and Goldman Sachs Hedge Fund Strategies LLC to put part of the nearly $1 billion increase to work. In November, investment staff extended the pension fund's relationship with Grosvenor by awarding a $300 million mandate for a customized opportunistic credit strategy to the firm.
The largest, most institutional tier of hedge funds-of-funds managers is coming in for the bulk of portfolio changes from institutional investors, including BlackRock Inc., Blackstone Alternative Asset Management, Grosvenor, Mesirow Advanced Strategies Inc., J.P. Morgan Alternative Asset Management Inc., Pacific Alternative Asset Management and UBS Hedge Fund Solutions LLC.
“The bigger managers are growing as institutional investors return to or invest for the first time in hedge funds of funds, getting institutional pricing through investing in separate accounts,” said William J. Ferri, group managing director and head of UBS Hedge Fund Solutions, New York.
Investors are coming back to hedge funds of funds because “they have found out how hard it is to handle the top-down calls needed to balance the portfolio effectively,” Mr. Ferri said.
UBS' hedge funds-of-funds business managed $34 billion as of Jan. 1.
BlackRock's New York-based alternative investment platform, for example, saw a $2 billion surge of net inflows into its hedge funds of funds in 2015, said Joshua G. Levine, managing director and head of business development. Much of the flow — which is continuing this year — was from increases from existing hedge fund-of-funds clients, as well as from new investors returning to hedge funds of funds from direct hedge fund investment programs, Mr. Levine said.
But he stressed that both types of investors increasingly are eschewing traditional commingled hedge funds of funds in favor of customized separate accounts that offer more control, better pricing and improved transparency.
BlackRock managed $21 billion in hedge funds of funds as of Dec. 31.