The $54.2 billion Maryland State Retirement & Pension System, Baltimore, was an active investor in hedge funds in the first half of 2019 with commitments of $200 million each going to Marshall Wace LLP's TOPS China A Share fund and Standard General LP's event-driven master fund.
In 2018, Maryland invested a total of $750 million in four hedge funds, with the largest allocation — $300 million — going to ExodusPoint Capital Management LP for investment in its flagship multistrategy fund.
"We have not been net adding to our hedge funds this year, but have been diversifying our strategies," Andrew C. Palmer, Maryland's chief investment officer, said in an email.
Funding for the two hedge fund investments made in 2019 came from existing hedge fund and traditional managers, not all of which were terminated, Mr. Palmer said.
He noted that the plan's hedge fund investments previously were focused on multistrategy managers, but the fund's investment team has been moving into "reallocating assets to higher-conviction managers with more concentrated products" as part of a two-year restructuring of Maryland's absolute-return portfolio.
"Overall, we will likely add additional (hedge fund) managers as we are still modestly below our long-range target for our absolute-return portfolio," which Mr. Palmer said is a mixture of hedge funds and private and public market funds. The absolute-return portfolio was 7.4% of total assets as of June 30.
The system reduced its use of hedge funds from a peak of close to 16% of assets in 2016 to less than 9%, he added, noting that Maryland also has hedge fund investments in its rate-sensitive, credit and growth equity portfolios.
P&I's analysis of reported hedge fund and hedge funds-of-funds activity also showed that terminations were up 23.2% in the first half of 2019 to $754 million.
Terminations from hedge funds year-to-date through June 30 were up 106.3% to $687 million compared to the six months ended June 30, 2018. The termination rate of hedge funds of funds by institutions fell by 76% to $67 million in the first half of this year compared to the first half of 2018.
Like Maryland, a swath of institutions are both hiring and terminating hedge fund managers as they fine-tune their portfolios, industry watchers said.
"On a net basis, there are new mandates going into hedge funds as institutional investors make manager upgrades, often into new hedge funds in the same strategy as a manager they terminated," said Peter Laurelli, the New York-based global director of research at eVestment LLC, Marietta, Ga.
"This is a totally reasonable and good thing," he added, noting that industrywide hedge fund flows tracked by eVestment tend to move into larger funds that had relatively strong performance the year before at the expense of both larger and small funds that failed performance expectations.
EVestment's data as of June 30 showed that total net outflow from hedge funds by all investors in the first half of 2019 was $44.6 billion, with $27.8 billion of that pulled in the second quarter. The net outflow in the second quarter was twice as high as in any other second quarter over the past 10 years, according to eVestment's analysis.
The $52.2 billion Teachers' Retirement System of the State of Illinois had the highest termination rate in the first half of the year among asset owners tracked by P&I. The Springfield-based fund redeemed assets totaling $520 million from three hedge funds, preceded by $526 million of redemptions from two funds in all of 2018.
The fund hasn't made any new investments in 2019, but did allocate a total of $930 million to seven hedge funds in 2018.
TRS trustees have debated the efficacy of its hedge fund portfolio during investment committee meetings over the past two years and are considering a change as part of an asset allocation review this year.
At the investment committee meeting on Aug. 2, R. Stanley Rupnik, chief investment officer, said TRS has been reducing the allocation to its diversifying strategies portfolio, which includes hedge funds.
Trustees reduced the long-term allocation in March to 10% from 14%. The actual allocation as of March 31 was 10.5%, according to a board document.