Top hedge funds at full capacity keeps $548 billion APG away

When it comes to top money managers, there aren't that many. Just ask Ronald Wuijster.

The 52-year-old oversees €470 billion ($548 billion) in assets for several Dutch pension plans, an amount that should make him a high-priority client for even the most coveted hedge funds and buyout firms. But these days, he can't find enough top performers to give money to.

"We would like to invest more in hedge funds and private equity but the very best of them virtually have no capacity to accept more of our money," Mr. Wuijster, the head of asset management at APG Group, said in an interview in its Amsterdam office. "We don't want to be on a gliding scale where we accept a lower return for the same amount of risk," he said.

Investing with the best money managers has always been difficult because they tend to limit the amounts they oversee to preserve fund returns, and they don't want to rely too heavily on a single client. But after a decade of unconventional monetary policy that's flooded private equity with new money while forcing dozens of former top hedge funds to shutter, that challenge looms even larger.

Mr. Wuijster declined to disclose the firms in which he invests, except that he doesn't allocate to activist funds because they tend to focus on short-term gains, which contradicts the pension's philosophy. Of the funds that remain in his universe, many are in a position to pick the investors they want, he said.

"Most of the time we are in these funds, but we can not always invest the desired amount in these funds because they want a diversified investor base," he said.

APG is majority-owned by its main client, the Dutch pension fund for government and education employees in the Netherlands, or ABP, Heerlen. About €405 billion of the assets it manages are from the pension fund, of which about 10% are invested in hedge funds and private equity.

A former portfolio manager at Robeco, Mr. Wuijster is a believer in active management, at a time when many flee to lower-cost passive funds. Hedge funds in particular have disappointed investors with lackluster returns, leading to a shakeout. One Dutch pension fund, PFZW, Zeist, in 2014 decided to stop investing in hedge funds altogether.

Over the past two years, more hedge funds shuttered than were started, a trend that has continued this year, according to data compiled by Eurekahedge. That's leaving more money with fewer firms, and forcing some of them to decline or limit fresh investor cash to avoid diluting returns. Among them are Millennium Management, billionaire Ken Griffin's Citadel and Elliott Management Corp., the hedge fund firm founded by billionaire Paul Singer.

The returns from APG's hedge fund investments — 4.5% annually over the last five years — are pedestrian when compared with the 11% investors would have made in global stock markets, but Mr. Wuijster says it's not fair to talk about an average performance without taking the funds' objectives into account.

"Some funds mitigate risks, some leverage risk, others provide an insurance against a certain market movement," he said. "You can barely say that hedge funds are one asset class because they all have different strategies."

APG's hedge fund program is managed by New York-headquartered New Holland Capital, a fund of funds that works exclusively for the Dutch firm. Its private equity investments used to be run by AlpInvest Partners, which APG and another Dutch pension fund manager, PGGM, sold to Carlyle Group in 2011, but are now increasingly allocated by an internal team.

While private equity firms haven't seen the shakeout that rattled hedge funds, getting into the top performers is still difficult because the industry has been flooded with new money. As central banks propped up stock markets over the past decade, private equity has been among the biggest beneficiaries. As a result, managers now sit on more than $1 trillion in commitments that have yet to be invested.

APG doesn't disclose fees for individual managers, but the latest annual report of the pension plan shows it paid a total of 64.5 basis points in management and performance fees in 2017. The bulk of those fees were paid for private equity and hedge fund investments.

To keep fees in check, APG has brought more and more of its traditional asset management in-house over the past decade. It now manages between 75% and 80% of assets by itself, a ratio that is one of the highest among its Dutch peers, Mr. Wuijster says. But for alternatives, the firm continues to rely on the top outside managers, even if that means it can't always invest as much as it would like.

"We know how to manage equities and bonds, we do almost 100% of that in-house," he said. "But that doesn't hold up for hedge fund strategies and private equity."