Institutional Investor's Alpha Magazine - December 2007/January 2008 - (Page 18)

Pension Corner portfolio at UM, Lundberg questions whether the hedge fund industry can deliver on its promises of high returns with low risk over the long term. “People haven’t really been happy getting 10 percent a year over the past three years,” he says. Lundberg continues to build the alternatives portfolio, which has been the source of the endowment’s greatest returns. The 35 percent allocation to venture capital, private equity and real estate provided respective returns of 30 percent, 47 percent and 45 percent in the fiscal year ended June 2007. Producing such gains has proved more challenging lately, as Lundberg grapples with the hybridization among once clearly differentiated alternative strategies. “We want to make room for good investments in any asset class,” he explains. “We ﬁnd the most representative portfolio to put it in, even if it’s not a perfect ﬁt.” Among the new, hybrid investments in the UM portfolio are equity managers that also use fixed income, ﬁ xed-income managers that take equity positions, hedge funds that invest in private equity and real estate managers that buy companies to get access to their real estate. “The key is to be ﬂexible enough to ﬁnd a way to include attractive investment strategies,” says Lundberg. looking to boost returns without drastically changing their asset allocation. To implement it, they frequently rely on funds of hedge funds to generate the alpha, or excess return, which is then transferred to another asset class whose returns are created using futures. DelSignore ﬁrst turned to hedge funds after Worcester fell victim to the bear market early this decade; its retirement fund lost 10.5 percent in 2002. After convincing the Public Employee Retirement Administration Commission (the agency that oversees Massachusetts’ public pension funds) of the merits of adding absolute-return strategies to the portfolio, he made a $12 million allocation in July 2005 to a fund of hedge funds run by the $50 billion statemanaged Pension Reserves Investment Trust. But when DelSignore tried to add a portable alpha plan the following year, he was told he couldn’t. Worcester already had $35 million in hedge funds — 5 percent of its portfolio at the time — and adding a portable alpha component would have breached a Perac rule prohibiting state pension plans from investing above that level. In mid-2007, however, Perac amended its rule and began allowing plans to invest as much as 10 percent in hedge funds. DelSignore, 58, says he and the rest of Worcester’s board were attracted to the strategy because it enables the fund to stabilize risk without compromising the potential for gains. Worcester currently has $46 million, or 6 percent of its assets, in hedge funds. Of that, roughly $15 million is invested with PRIT, while the remainder is divided equally between funds of hedge funds run by New York ﬁrms Aetos Capital and Blackstone Alternative Asset Management. For the ﬁscal year ended December 31, 2007, Worcester’s portfolio was up 8.5 percent. The Standard & Poor’s 500 index returned 3.5 percent for the same period. Addition of the portable alpha plan remains contingent on permission from Perac, but DelSignore and the rest of Worcester’s board are so sure they will be given the green light that the fund’s consultant, Westwood, Massachusetts–based Meketa Investment Group, is already winding up its search for portable-alpha managers. DelSignore expects to ﬁll the post by the end of January and plans to initiate funding by April. — Katie Gilbert Worcester Retirement System ames DelSignore is proof that persistence pays off. Two years after state regulators quashed his plan to add a portable alpha program to Worcester, Massachusetts’ $767 million retirement fund, he is ﬁnally getting the go ahead. “You can’t bet everything on one direction,” says DelSignore, who has been the auditor for the City of Worcester and chairman of the board of its pension plan for the past 17 years. “You want to stay diversiﬁed without giving up returns. Portable alpha is a way to do that.” Portable alpha is a popular strategy among pension plans MANDATES North American pension funds, foundations and endowments plan to substantially increase their hedge fund allocations to an average of 8.9 percent, from 7.5 percent, by 2009, according to a recently released report by Tacoma, Washington–based Russell Investments. Here are some institutions that are part of the trend. SEARCHES* Investor Lincolnshire County Council Pension Fund Toronto Transit Commission Worcester Retirement System Assets ($ millions) $2,485 Mandate amount ($ millions) NA Details The U.K.-based deﬁned beneﬁt plan is readying itself for its initial investment in hedge funds. The plan’s consulting ﬁrm is Hymans Robertson. The plan is in the early stages of carving out its third hedge fund stake, which it expects to complete by mid- to late 2008. The Massachusetts plan just completed a request for proposals for a portable alpha manager. Meketa Investment Group is consulting. 3,537 NA 767 $15 ALLOCATIONS* Investor Boston Retirement System Assets ($ millions) $3,100 Mandate amount ($ millions) $150 Details The system hired Federal Street Partners, GAM and Permal Group to manage $50 million each in a fund of hedge funds. New England Pension Consultants advised. Hewitt Associates helped the fund with its maiden 5 percent allocation to hedge funds: £10 million ($21 million) to Numeric Investors and £25 million to Lansdowne Partners. London Borough of Enﬁeld 1,449 72 * Ongoing searches for and recent allocations to hedge funds or funds of hedge funds by institutional investors, as reported by iisearches.com in December. 18 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2007/JANUARY 2008 http://iisearches.com

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2007/January 2008

Institutional Investor's Alpha Magazine - December 2007/January 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Liberal Returns The Good Guy: Inner-city MVP Cover Story: Marathon Men Interview: Rizk Management Profile: Living on Hostile Ground Profile: Buy and Hold In Theory: The Fallacy of Portable Alpha Strategies: Changing Course Alpha Bytes: Behind the Scenes Unhedged: Commentary: An Activist Alternative

Institutional Investor's Alpha Magazine - December 2007/January 2008

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