Institutional Investor's Alpha Magazine - December 2008 - (Page 16)

Pension Corner Strategies Doubling Down Two years into his job, the investment director at Drexel University is upping the hedge fund ante. BY KATIE GILBERT J oshua Kaplan, director of investments at Drexel University, is familiar with less-than-reassuring truths, like the fact that global hedge fund losses surpassed $150 billion in October alone — $115 billion from performance and $41 billion from redemptions, according to Chicago-based Hedge Fund Research. But he remains undeterred in his plan to allocate 19 percent of Drexel’s $490 million endowment to hedge funds. At a time when many, if not most, investors see every reason to bail, Kaplan sees opportunities. Since joining Drexel University in 2007, Joshua Kaplan has pushed hard for a hedge fund allocation. “The hedge fund world in general is doing a heck of a lot better than the equity market,” notes Kaplan, 34. “Hedge funds are a much more advantageous place to be through this market turmoil than long-only positions.” Kaplan is the ﬁrst ofﬁcial director of investments at the Philadelphia school’s endowment. Before his arrival in January 2007, portfolio decisions were made by the univer- sity’s eight-member investment committee, CFO Thomas Elzey and Boston-based consulting ﬁrm Cambridge Associates. The endowment had avoided hedge funds. Kaplan, who was CIO at Smart Financial Advisors, a multifamily wealth management ofﬁce outside Philadelphia, is a devotee of diversiﬁcation and doesn’t believe in concentrated bets. He errs on the side of being conservative and emphasizes downside volatility, trying to quantify potential drawdowns. Kaplan says he’s never going to put all his eggs in one basket. Two years into the job, he has hired an investment analyst and plans to bring in another within the next few months. He is also ﬂeshing out the overhauled asset allocation he proposed and which the board approved in May. “What the new policy did was two things,” explains Kaplan. “It set an allocation goal that was more in line with our peers’, and it gave us ﬂexibility to be more opportunistic and efﬁcient within our allocation.” He says the change boosts exposure to three areas: hedge funds, private capital (private equity, venture capital and leveraged buyouts) and real estate. Kaplan plans to fund these expansions by cutting investments in domestic equity and bonds. He has already reduced equity to 40 percent from 70 percent and expects to trim the current 20 percent bond allocation by one third. About 10 percent is allocated to cash and 30 percent is in a combination of private equity, venture capital, real estate and hedge funds). Kaplan’s ﬁrst priority: hedge funds. He expects eventually to expand from two to roughly 20 managers in the endowment’s hedge fund allocation and plans to forgo funds of funds in favor of direct hedge fund investments to avoid the extra layer of fees. Kaplan says that issuing requests for proposals isn’t part of the new-manager hiring process. He hopes to ﬁnd managers instead by networking, attending conferences, searching databases and even responding to cold calls. In July, Kaplan hired the endowment’s first hedge funds, though he won’t divulge their names. They are multistrategy funds that each account for about 2 percent of the portfolio. With their relatively conservative and largely above-board characteristics — they use little or no leverage, are registered with the Securities and Exchange Commission and have strong risk management capabilities — these funds ﬁt well into what Kaplan calls the portfolio’s “core positions.” “The plan is to build out these positions — our anchor managers — to initiate the allocation in our hedge book,” Photograph by Ryan Donnell 16 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2008/JANUARY 2009

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

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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