Texas fund trims hedge fund roster, not allocation

Texas County & District Retirement System continues to reduce its number of hedge funds, but not the size of its $6.2 billion hedge fund portfolio.

In light of disappointing returns, the investment staff and trustees of the $25.6 billion fund — like their peers at many other institutions — are reviewing the role and efficacy of hedge funds within the overall portfolio.

But rather than cut back the 25% target allocation to hedge funds, TCDRS officials instead are culling managers.

The move will allow the hedge fund team to consolidate investments with fewer managers in which they have higher conviction, said Paul J. Williams, chief investment officer, in an interview at the system's Austin headquarters.

Investment officials will redeem a total of $760 million from five hedge funds and reallocate the assets among the 23 remaining hedge funds in the portfolio, Mr. Williams told the fund's trustees during a board meeting on Dec. 1.

York Capital Management Global Advisors LLC will be terminated for performance of its $223 million allocation, Mr. Williams said. The York Capital Management Fund was down a net 4.9% for the year ended Sept. 30, compared to a gain of 6.2% for the HFRI Event Driven index and 4% for the HFRI Merger Arbitrage index, the benchmarks for the pension fund's $1.5 billion event-driven portfolio.

York Capital officials declined to comment, a spokesman said.

As part of the manager consolidation within its hedge fund portfolio, TCDRS also will pull assets from two funds in its $1.8 billion long/short equity portfolio: Archipelago Partners, with $233 million, managed by Wellington Alternative Investments LLC in a hedge fund of funds; and Ascend Partners Fund II, with $6 million, managed by Ascend Capital LLC.

About $211 million will be redeemed from Brevan Howard Asset Management LLP's Brevan Howard flagship fund from within TCDRS' $1.1 billion global macro portfolio.

Asia-focused multistrategy manager LIM Advisors Ltd. will receive a redemption request for $87 million from the LIM Asia Multi-Strategy Fund. The pension fund's multistrategy portfolio totaled $427 million as of Sept. 30.

In the past, the municipal fund has spaced out its hedge fund terminations: between 2010 and 2014 TCDRS asked to redeem $674 million from five hedge funds and still has a total of $21 million remaining in side pockets with these funds.

Mr. Williams stressed in the interview that changes are in pursuit of alpha and volatility control, and moving redeemed assets to other existing hedge fund managers will contribute to those goals.

Returns of the district and county fund have improved as 2016 progressed and were “additive to the portfolio” in the third quarter, Kathleen K. Barchick, senior managing director at Cliffwater LLC, the fund's consultant, told trustees during the December meeting.

Annualized returns for periods ended Sept. 30 for the TCDRS hedge fund portfolio have consistently topped those of its benchmark, the HFRI Fund of Funds Composite: three months, 2.54% (benchmark, 2.53%); one year, 1.38% (0.62%); five years, 5.69% (3.19%); and 10 years, 3.74% (1.78%).

Since June 1, TCDRS has allocated $430 million in additional assets to six existing hedge fund managers:

nSilver Point Capital Fund, $75 million for a total of $347 million, manager by Silver Point Capital LP;

nDavidson Kempner Institutional Partners, $50 million for a total of $313 million, managed by Davidson Kempner Capital Management LP;

nHighline Capital Partners QP, $50 million, for a total of $271 million, managed by Highline Capital Management LP;

nMW Eureka (U.S.) Fund, $50 million on for a total of $297 million, managed by Marshall Wace LLP;

nLakewood Capital Partners, $30 Million, for a total of $276 million, managed by Lakewood Capital Management LP; and

nCanyon Value Realization Fund, $25 million, for a total of $229 million, managed by Canyon Capital Advisors LLC.

The TCDRS hedge fund team is also on the lookout for new managers and in November, placed $150 million in Sound Point Credit Opportunities Fund, managed by Sound Point Capital Management LP. Portfolio managers there will seek both long and short investments in distressed bank debt.

The team received approval from the board during the meeting for a possible investment in Boston Partners Long/Short Equity Fund, managed by Boston Partners Asset Management LLC. The size of the allocation has not been determined, Mr. Williams said.

Among other action concerning the hedge fund portfolio, Mr. Williams told the board that TCDRS' hedge fund team will continue to monitor on Emerging Sovereign Group LLC's long/short equity offering, EMG Cross Border Equity Fund, due to performance concerns. Returns of the $180 million investment in the fund as of Sept. 30 were down 6.4% year-to-date and down 4% over one year. Returns of the HFRI Equity Hedge index, the benchmark for the long/short portfolio, for the same periods were down 4.2% and down 6%, respectively.

Also, the board was advised that Cliffwater had reviewed Och-Ziff Capital Management Group LLC's September settlement with U.S. federal authorities relating to bribery charges in Africa, and determined that the alternative investment manager's investment operations are not affected.

Ms. Barchick recommended that TCDRS maintain its total investment of $759 million in one Och-Ziff hedge fund and three long-only opportunistic credit funds. Mr. Williams said investment staffers will “keep a close eye” on the firm.In other alternative investment news from the latest TCDRS board meeting, trustees approved an investment pacing plan for private equity, private real estate, direct lending and distressed debt for the coming year that maintains the same overall allocations as the previous year.

In order to maintain the fund's buildup into private equity, the 2017 budget for the asset class is $1 billion. The $25.6 billion pension fund committed $513 million thus far in 2016 from the $1 billion set aside, said Gabrielle Zadra, a Cliffwater senior managing director, during the meeting. The private equity portfolio totaled approximately $2.8 billion as of June 30.

The board agreed to earmark $400 million each for the private real estate and direct lending portfolios in 2017. As of June 30, the portfolios totaled approximately $538 million and $417 million, respectively.

Distressed debt, which totaled about $553 million on June 30, has a $250 million allocation for the next calendar year.

Separately, trustees granted staff discretion to consider new and additional commitments to 21 alternative investment funds managed by existing mangers before the board next meets in April 2017.

The dollar values have not been set for the new and additional investments, Mr. Williams said. n