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

Pension Corner Strategies Kansas Evolves A university endowment in a conservative state marches ever more steadily to the hedge fund drum. BY KATIE GILBERT D avid Weaver is no creationist, certainly not in the ﬁscal sense of the word. The portfolio he manages for the Kansas State University Foundation changes through “evolution, not revolution,” he likes to say. As vice president of investments for the $340 million endowment, Weaver has lived stringently by that mantra in these times of market discord. Never has he been more vigilant about the managers he picks. “Our strategy is to attempt to anticipate market events and construct the portfolio to be ready, not tempt chance in the midst of turmoil,” he explains. David Weaver has steered the Kansas State University Foundation steadily toward bigger hedge fund allocations. Since 2000 the foundation has separated its hedge fund allocation into two distinct groupings: long-short funds and absolute-return funds. The ﬁ rst category, of course, consists of managers who invest primarily by taking both long and short positions on stocks. The absolute-return portfolio houses managers pursuing merger arbitrage, relative-value and distressed-debt strategies. This distinction allows the endowment the benefit of two countervailing plays, Weaver explains. “We want strategies in the portfolio that will give us protection in a down market, because we have a very low allocation to ﬁ xed income,” Weaver explains. “Absolute return does that. The long-short funds are there for another reason — to be a return enhancer and a volatility reducer.” He appears to have struck the right balance. The KSU Foundation’s return for its fiscal 2008, which ended June 30, was 1.46 percent (foundations and endowments, on average, lost 4.7 percent over the same time period). In July the foundation added two more long-short equity hedge funds to its roster, rounding out the asset class. Weaver says that for the ﬁrst time since he established the long-short category eight years ago, the portfolio offers the diversiﬁcation and risk level he has sought. He refuses to disclose which funds he invests in, however. The university, whose main campus is in Manhattan, Kansas, has kept its absolute-return and long-short equity hedge funds separate since it ventured into the asset class in 2000 by carving out a 5 percent allocation and directly investing in a half dozen or so funds. Weaver wanted to see the allocation grow, but he didn’t want to do it in a headlong way, so he built it slowly: The endowment’s hedge fund portfolio invests directly now with 16 managers and one fund of hedge funds, and it accounts for 18 percent of the endowment’s total assets (14 percent in long-short equity and 4 percent in absolute return). Overall, assets — in addition to those harbored in hedge funds — are split into traditional long equities (20 percent domestic, 18 percent international), private equity (15 percent), inﬂation-hedging assets like real estate and oil (18 percent) and deﬂation-hedging assets like long-term bonds (11 percent). Weaver joined the endowment 23 years ago, when its portfolio was comparatively basic, consisting solely of stocks and bonds. But time and faith combined forces, and change ensued. “We increased the allocation [to hedge funds] as we got comfortable with the strategy,” Weaver recalls. What else has happened as new hedge fund characteristics and strategies have emerged or, to put it another way, as evolution has set in? “We gained conﬁdence in our ability to identify good managers and monitor them,” he says. Photograph by Jeff Cooper 18 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2008

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

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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