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

Pension Corner Landstinget Västmanland everything we do,” says Holst, 34, Landstinget Västmanland’s head of ﬁnance. “We’ve been very cautious. One day, hopefully, the market will straighten out, but until then we’ll monitor our manager decisions very carefully.” Landstinget Västmanland made its ﬁrst hedge fund investment in early 2005, allocating 10 percent of its assets to a fund-of-funds portfolio managed by British Virgin Islands–based Victory Capital Management. For two years the investment performed as expected, returning 5 percent annually. Then came the ﬁrst credit hiccups, in 2007. One of ﬁve hedge funds in Victory’s portfolio, a New York–based mortgage-backed-securities fund called West Side Advisors, began sputtering and then closed in August. For the year, Landstinget Västmanland’s hedge fund portfolio was down 20 percent, limiting its overall return to 1 percent. (The fund had allocated 20 percent to Swedish equities, which were in the red as well, 55 percent to Swedish ﬁxed-income funds and 15 percent to international equities.) Hoping to stave off further setbacks, Holst and Landstinget Västmanland’s ﬁve-member ﬁnance department decided in August 2007 to redeem the plan’s remaining $14 million hedge fund investment. (They completed the process last month.) The money will be moved into what they view as a less risky option: international stocks, which will account for up to 55 percent of the portfolio. The equity allocation’s international focus is owing to the volatility of Sweden’s domestic stocks. The remainder of the foundation’s money will be in Swedish ﬁxed-income investments. Making Landstinget Västmanland’s situation even bleaker is the likelihood that pension costs will increase by 50 percent over the next ﬁve to ten years because of Sweden’s aging population. Holst figures the fund can meet its obligations if it can produce returns of 6 percent over the period, but that is a daunting goal: 2008 looks to be the ﬁrst year in which the fund will lose money (as of August 31 the portfolio was down 6.1 percent). The local economy isn’t helping — the Swedish stock market was down almost 40 percent this year as of October 13. “If the turmoil continues, we might not be able to do what we need to do,” Holst says. “Unfortunately, if we don’t have the money, we’d cut down on health care.” Holst’s predicament mirrors a bigger national problem in Sweden, which may have to decide between health care spending and pension saving. Landstinget Västmanland, in fact, is comparatively strong — it is among the ﬁve most ﬁnancially stable of Sweden’s 21 county funds. Holst has been at the helm of the fund for almost eight years. Previously, he worked as a private-banking adviser at Stockholm-based Nordea, the largest ﬁnancial group in the Nordic countries, where he developed a fondness for hedge funds. He says his plan’s hedge fund breakup may be more a trial separation than a divorce. “If we ﬁnd some that are transparent and low-risk, we may well invest later on,” he says. “But right now our priority is to ﬁnd new managers in stocks and ﬁxed income.” T he Swedish public health care and pension fund managed by Fredrik Holst was in trouble even before the ﬁrst rumblings of a global credit crisis. Now, after a year in which the fund has seen one of its managers implode and its own liabilities soar because of a weak economy, Holst is pulling out of hedge funds to try to contain the damage. Landstinget Västmanland, a $200 million vehicle that handles public health care costs for Västmanland County’s 260,000 residents as well as the pensions of 6,000 public employees and retirees, faced a $650 million deﬁcit going into 2007. Despite trying to shrink that number — investments in hedge funds were a major part of that effort — a year of market tumult has left the plan in a precarious position that has killed its appetite for alternatives. “We have to consider the short-term economic results of Despite their negative performance so far in 2008, hedge funds still boast returns superior to the equity markets’. However, they are not outdoing ﬁxed income. Hedge Fund Research’s HFRI composite index was down 9.41 percent year-to-date through September 30, which was far below the –0.02 percent return of the Lehman Brothers U.S. aggregate bond index over the same period. (The Standard & Poor’s 500 index was down 20.68 percent.) Below are examples of institutional investors that are either looking at or have invested in hedge funds. SEARCHES* Assets ($ millions) $3,900 Mandate amount ($ millions) $117 MANDATES Investor New York City Employees’ Retirement System Details The plan approved an allocation to hedge funds of up to 3 percent at its recent board meeting. Instead of issuing a request for proposals, the fund will have consulting ﬁrm Callan Associates conduct the search. Managers are expected to be hired in a few months. The investment committee is considering venturing into hedge funds for the ﬁrst time with a $25 million mandate. A deﬁnitive decision will be made by year’s end. Over the next three years, the scheme plans to increase its hedge fund allocation from 9.4 percent to 12 percent. It may seek managers for the increase, which will be funded from its equity and ﬁxed-income portfolios. Tampa General Employees Retirement Fund YMCA Retirement Fund 550 25 4,800 125 ALLOCATIONS* Investor Arapahoe County Employees Retirement Trust Assets ($ millions) $ 238 Mandate amount ($ millions) $24 Details Based in Littleton, Colorado, the trust has committed $24 million to Blackstone Alternative Asset Management’s fund of hedge funds. The ﬁrm replaces OFI Institutional Asset Management, whose contract was terminated because of personnel changes. The New Castle, Delaware–based fund has committed $10 million each to Crestline Investors and EnTrust Capital for a fund-of-hedge-funds mandate. The system has proposed a $75 million commitment to the Lim Asia Arbitrage Fund, pending the completion of due diligence. New Castle County Employees’ Pension Program New Jersey Division of Investment 400 20 76,000 75 * Ongoing searches for and recent allocations to hedge funds or funds of hedge funds by institutional investors, as reported by iisearches.com in September. 20 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2008 http://iisearches.com

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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