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

Pension Corner Strategies Risk Rewarded S At the Ohio Highway Patrol Retirement System, a 2006 move into hedge funds looks smart in retrospect. BY KATIE GILBERT The system’s 6.8 percent allocation to funds of hedge funds has behaved generally as expected. Although it was down 8 percent this year through the end of September, that compared well with the 19 percent drop in the Standard & Poor’s 500 index for the same period. (HPRS’s overall portfolio took a 15 percent hit from January through September.) “We’d certainly be happy if the hedge funds were positive,” Curtis says. “But they’ve been what we’ve expected them to be: noncorrelated revenue streams.” Since the move into funds of funds, the portfolio has returned 2.2 percent (6.1 percent on its funds-of-funds portion); its main current fund-of-funds holdings are equity-based and include Evanston Capital Management’s Weatherlow Offshore Fund II and Protégé Partners’ Opportunistic Fund. HPRS’s success shouldn’t be attributed entirely to luck. Curtis — who joined the pension fund in 1998, when its holdings consisted solely of stocks, bonds and some real estate — conducts a rigorous and somewhat atypical vetting of every fund of funds under consideration. Rather than expecting a fund-of-funds manager to do all the heavy lifting, Curtis researches hedge funds himself and then seeks out managers who can provide access to them. “If you look at how a fund-of-funds strategy works — without being demeaning to the fund-of-funds people — I would say the rocket science exists at the underlying manager level,” asserts Curtis, who has presided over annual returns of 4.5 percent since he joined HPRS. “That’s why we select a given fund of funds based on who can give us access to underlying managers that have consistently done a good job.” Curtis plans to take just such an approach to hiring a fund of funds to manage a $30 million mandate that HPRS hopes to salvage from an investment it had in an arbitrage fund run by now-defunct Lehman Brothers. The retirement system got 45 responses to a request for proposals that had a mid-October deadline; Curtis expects a decision by mid-December. In the meantime, he plans to visit several ﬁnalists to do due diligence. The plan’s portfolio is divided into domestic equities (45.6 percent); international equities (14.5 percent); alternatives, including hedge funds, real estate and private equity (19.8 percent); ﬁ xed income (18.1 percent); cash (0.4 percent); and a strategy called a global tactical asset allocation (1.6 percent), which allows managers to Photograph by Brad Feinknopf ometimes it’s better to be lucky than good. That’s how Richard Curtis, executive director of the $693 million Ohio Highway Patrol Retirement System, explains not just the fund’s shrewd decision two years ago to get into hedge funds in the ﬁrst place — but also its subsequent choices on fund-offunds hirings. “We needed diversiﬁed revenue streams,” notes Curtis, who says that at the beginning of 2006, pension fund directors sensed trouble on the horizon. “Our assessment was that in the next three to ﬁve years, we would experience turbulent market conditions. I think the wisdom of the investment is borne out by the numbers.” Richard Curtis seeks alpha for Ohio’s Highway Patrol retirement fund. The bottom-line fear was that what Curtis calls the fund’s “traditional asset allocations” would not produce the minimum 8 percent rate of return the fund seeks. The move into hedge funds was prescient, though Curtis says no one at HPRS foresaw the depth of the current gloom: “We certainly never would have expected the things that we’ve seen here in the market recently.” 18 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

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

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.