Institutional Investor's Alpha Magazine - September 2008 - (Page 18)

Pension Corner Strategies Culling the Herd After joining Phillips Academy Andover, Amy Falls eliminated half of its hedge fund managers. BY KATIE GILBERT T he hedge fund managers involved in Phillips Academy Andover’s $804 million endowment were reminded after the hiring of chief investment officer Amy Falls three years ago that their status was not to be taken for granted. During Falls’s ﬁ rst full year — when returns nearly doubled, to 21.2 percent — the endowment began to drastically trim the number of managers; since her arrival it has cut the roster to 18, from 35. “When I took over, we had more managers, and we knew less about each one,” says Falls, 44, a 1982 graduate of Andover who left her New York–based job at Morgan Stanley, where she had been a managing director and global ﬁ xed-income strategist, to take the post. “What we’ve tried to do is to go Phillips Academy Andover CIO Amy Falls looks for hedge funds that are not correlated with market indexes. through and systematically concentrate on managers in whom we have a lot of conviction.” The move was part of a broader rethinking that Falls advocated for streamlining the endowment’s allocation to alternative investments. Although Andover has fewer managers now, the private school has a larger percentage of its assets in hedge funds, and the mix is not as closely correlated to stock indexes as it used to be. Andover, about a 40-minute drive north of downtown Boston, became something of a pioneer by hiring Falls: It was the ﬁrst secondary school in the U.S. to put a chief investment ofﬁcer on its payroll. Since then one other boarding school has followed suit: Choate Rosemary Hall in Wallingford, Connecticut, which took on a CIO in September 2006. For Andover the decision to hire a CIO grew naturally from earlier efforts to model its investments after those of university endowments. “The school ﬁgured that if we were going to start to look more like a college in terms of our investment proﬁ le,” Fall says, “we should look more like a college in terms of our oversight.” A part-time, 12-member volunteer committee managed the school’s portfolio before the appointment of Falls. The committee had permitted a 30 percent direct allocation to hedge funds (since increased). Though members brought considerable alternative-investments expertise to the table, they lacked the time to sort through and pick managers. Falls’s presence allows for more-informed decisions on which hedge funds managers to hire (she won’t reveal any names). The other major alteration: relabeling and distilling the endowment’s hefty hedge fund allocation into two clearcut categories — 25.7 percent of total assets to absolutereturn hedge funds and 9.2 percent to what Falls calls “enhanced equity” hedge funds. The former category houses hedge funds working completely outside the equity markets, like distressed-debt and some multistrategy funds. The latter focuses on long-short managers. “We have begun to move away from the concept of using hedge funds as an asset class,” explains Falls. “The allocation hasn’t gone up much, but we think about it very differently.” The remaining two thirds of Andover’s endowment is divvied up among U.S. equities (17.6 percent); foreign equities (11.5 percent); private equity (10.7 percent); real assets, including timber, oil-and-gas partnerships, minerals and commodities (9.9 percent); ﬁ xed income (6.1 percent); emerging-markets equities (5.8 percent); and cash (3.6 percent). Falls says the reorganization gives the endowment a better idea of its risk proﬁ le and leaves its portfolio less vulnerable to the whims of the stock market. “One of the things that I ﬁ rst looked at when I got here was the correlation of the endowment’s returns to the equity market,” she explains. Falls had heard that Photo by Lenard Smith for Alpha 18 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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