Institutional Investor's Alpha Magazine - September 2008 - (Page 20)

Pension Corner institutional investors — like pension funds and endowments — tend to have more beta in their portfolios than they think, and she suspected that was true of Andover. “Even though we had gone substantially into alternative assets, we still were showing a pretty high correlation to the stock market,” she says. “When you drilled down, it was because some of the hedge fund strategies had a high correlation. We began to reclassify.” The setup has already proved effective, Falls says, helping buffer the portfolio through recent market turbulence. As she had hoped, the enhanced-equity portfolio has provided downside protection, and the absolute-return fund yielded an 8.5 percent return for the ﬁscal year ended June 30, giving the endowment a much-needed boost. The endowment’s 12-month return through June 30 was 1.75 percent, compared with the 13 percent loss on the Standard & Poor’s 500 index over the same time period. “June was especially rough,” Falls says. “But it certainly validated the hedge fund allocation. I feel that they’ve done what they were supposed to do.” Essex’ foray into hedge funds began in March 2006 with an investment in the PRIT Absolute Return portfolio, up 11.21 percent for the ﬁscal year ended June 30, 2006, and 13.86 over the next 12 months. “The state fund did well the ﬁrst couple of years we had it,” says Timothy Bassett, the Essex board’s chairman and executive director. But it has been downhill from there. Although PRIT, which is run by Boston-based Massachusetts Pension Reserves Investment Management, hasn’t released its returns for the ﬁscal year ended June 2008, Bassett says that it was down 2.79 percent for calendar year 2008 through July 31 — failing to deliver the protection Essex had hoped for. “A hedge fund allocation is supposed to smooth out the awry periods,” Bassett notes, “and the state fund had a much bumpier ride than we’d anticipated.” The PRIT investment came after the pension board cleared a state-mandated hurdle that requires public funds to have at least $250 million in assets before investing in hedge funds. Bassett says the decision to jump into hedge funds was easy and that the PRIT fund of funds was an attractive option for its diversification and for the implicit vote of conﬁdence it had gotten from other state and municipal funds that had given it money. “We thought that it would offer an important asset class and could contribute to performance,” Bassett explains. “And with the PRIT fund we weren’t making a solo bet.” Essex initially allocated the maximum amount of its assets allowed by the state: 5 percent. The Massachusetts Public Employee Retirement Administration Commission increased the maximum to 7.5 percent in September 2006, then raised it again in 2007, to 10 percent. Each time, Essex increased its hedge fund allocation. The rest of its portfolio remains divided among equities (57.5 percent), ﬁ xed income (17.5 percent), real estate (10 percent) and private equity (5 percent). With the help of New York–based Segal Advisors, Essex released a request for proposals in June that yielded responses from 32 fund-of-funds ﬁrms. At the end of September, the board will interview six ﬁnalists and will ultimately choose one to manage the $15 million. A year from now it will compare those returns with PRIT’s. That’s also when it will consider moving all of its hedge fund allocation into whichever fund is the winner. — K.G. Essex Regional Retirement Fund here’s a fund-of-funds contest unfolding in Danvers, Massachusetts. The Essex Regional Retirement Board, citing poor returns, is pulling half of the $30 million it invested in a state-run portfolio. The board, which controls $272.5 million, will choose a fund of hedge funds in September in which to invest that $15 million and then — after one year — consider allocating the entire $30 million to whichever of the two funds has done best. T Corporate pension plans have taken a sharp blow in recent months. A report released by Credit Suisse in late July reveals that the 372 companies in the Standard & Poor’s 500 index that have deﬁned beneﬁt pension plans currently have an aggregate funding deﬁcit of approximately $110 billion — a stark contrast to the collective $60 billion funding surplus they reported at the end of 2007. Below is a sampling of deﬁned beneﬁt pension plans seeking to improve returns by investing in hedge funds. SEARCHES* Investor EDF Energy (Electricity Supply Pension Scheme) Assets ($ millions) $ 4,332 Mandate amount ($ millions) $437 Details The London-based scheme is in the initial stages of analyzing hedge funds and may invest 5 to 10 percent in the vehicle for the ﬁrst time. The fund hopes to hire an asset manager before the end of the year. The Piscataway, New Jersey, system plans to invest 5 percent in hedge funds and accordingly cut down on its large-cap equity exposure. The scheme, based in New York, plans to invest in currency hedge funds by reducing its ﬁxed-income commitments by 1 percent, to 31 percent. MANDATES Telcordia Technologies 1,800 90 United Nations Joint Staff Pension Fund ALLOCATIONS* Investor Ford Motor Co. 41,000 750 Assets ($ millions) $46,000 Mandate amount ($ millions) $1,000 Details The fund, based in Dearborn, Michigan, has agreed to commit $1 billion to Lehman Brothers’ hedge fund portfolio. The allocation will be funded in various stages. The Berkshire, U.K.–based system hired UBP Asset Management for a £20 million ($36 million) fund-ofhedge-funds mandate. The Stockholm-based schemes invested 134 million Swedish krona ($21 million) in funds of hedge funds through newly hired Brummer & Partners and Indecap. The purse was split equally. InterContinental Hotels U.K. Pension Plan Swedish Match Pension Schemes 542 36 309 21 * Ongoing searches for and recent allocations to hedge funds or funds of hedge funds by institutional investors, as reported by iisearches.com in July and August. 20 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008 http://www.iisearches.com

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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