Texas Employees Retirement System, Austin, hired Pacific Alternative Asset Management Co. to provide an emerging hedge fund manager investment platform.
ERS is the first investor to sign on to PAAMCO Launchpad, which will provide seed capital to hedge fund managers from day one through the early stages of fundraising.
The $29 billion pension fund has a $1 billion emerging manager program in place and invests $1.6 billion in hedge funds across its whole portfolio, but has been looking for a way to invest in emerging hedge fund companies for some time, said Panayiotis Lambropoulos, ERS' lead hedge fund portfolio manager.
Pension fund investment staff will collaborate with PAAMCO Launchpad's team to identify potential hedge fund managers for the platform. Both entities will conduct separate due diligence and each will decide whether to invest in selected managers.
ERS will invest in commingled fund vehicles offered by selected hedge fund managers while PAAMCO will invest through managed accounts, said Andrew Gitlin, CEO of PAAMCO Launchpad.
ERS will benefit from sharing the revenue of the newly fledged hedge fund managers, reduced management and performance fees, and a profit when the manager moves out of the Launchpad program and repays the fund for its investment, PAAMCO's Mr. Gitlin said.
PAAMCO's Launchpad investments in emerging hedge fund managers will not include a revenue share, Mr. Gitlin said.
"The goal is for PAAMCO and Texas Employees to invest in these managers but we won't always be in tandem," Mr. Gitlin said.
"PAAMCO does want to invest in these managers side-by-side with us, which we support because having both investors will be attractive to hedge fund managers" and will help them grow, said Ms. Kassan.
ERS hasn't determined the size of its Launchpad investment but will create a separate portfolio for the emerging hedge fund manager program within its special situations allocation, said Sharmila Chatterjee Kassam, deputy chief investment officer.
Mr. Gitlin said he expects the combined investment by ERS and PAAMCO will be about $1 billion.
Other institutional investors have expressed interest in the model, Mr. Gitlin said, noting that his target for the Launchpad program is about $3 billion total.
Mr. Lambropoulos said the hedge fund team at ERS is ready to start talking to managers.
"We are open for business," he said, noting that ERS and PAAMCO Launchpad will host a reception in New York in early autumn in order to meet emerging hedge fund managers.