Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 48)

Investment Consultants “are tremendously underallocated in liquid-asset classes.” In the second quarter of 2007, Curtis began shifting his own endowment clients into even more liquid assets. But although most colleges and universities can withstand a major market downturn by cutting back on spending for facility improvements or academic programs, retired teachers and auto workers have no such buffer. To free up cash, some fund ofﬁcials are even trying to sell private equity and hedge fund stakes on the secondary market, where investors can sell their shares. Steve Nesbitt, head of hedge fund consulting ﬁrm Cliffwater in Santa Monica, California, says these investments spell potential bargains for hedge-fund-hungry investors previously shut out of closed funds run by top-tier managers like Greenlight Capital and Lone Pine Capital. Along with the secondary-market discount comes a big potential savings for buyers who can avoid paying performance fees until after the fund hits its original high-water mark. But Giovannetti, the Memphis consultant, says he will steer clear. “I wouldn’t buy a position in Citadel or Maverick in the secondary markets just because it appears you are buying it at a discount,” he says. “At the end of the day, what is that fund going to do to manage their business? funds. Rogerscasey’s Lynch is regularly visiting these funds now to determine managers’ motivation and whether they plan to remain in business. He reports wide use of gates to halt redemptions and has just lowered his ﬁrm’s ratings on several multistrategy managers who have lost more than half their assets and staff. Angeles CIO Rosen is highly critical of hedge fund managers who close shop in a bad market. “Investors never have a chance to make back their money,” he says, and as part of his due diligence he tries to measure certain intangibles: “We try to understand the character of the people we are investing with.” David Gold, a hedge fund research consultant in Watson Wyatt Worldwide’s New York ofﬁce, is studying how hedge fund managers compensate themselves, given that many hedge funds will now have to make do without performance fees for at least the next year. Across the board, consultants insist that the pressure on the hedge fund industry will ultimately result in better terms for their clients. Gold is talking to managers about renegotiating fees and conditions, for instance. Some managers, like Camulos Capital, have already done so. The credit-strategy firm in Stamford, Connecticut, cut its management fee to 1.25 percent from 2 percent and its performance fee in half, to 10 percent, in exchange for locking up investors’ money through September 2009. Although institutional investors for the most part are sticking with their managers for now, little new money is being allocated to hedge funds. But Peter Keliuotis, a consultant with Strategic Investment Solutions in San Francisco who points out that investors who got into distressed funds 18 months ago now regret it, says that investing steadily in hedge funds rather than diving in all at once may be the ticket. Had distressed-funds investors waited and averaged in over time, they would be better able to take advantage of today’s opportunities. A basic belief in the utility of hedge funds seems still very much alive at many pensions, endowments and foundations — and among consultants. “Some of our clients should be building up exposure to macro and commodity trading advisers. They always do well in a crisis,” explains Aksia CEO Vos, who says he also favors long-short equity for its simplicity. Ford, the Santa Barbara retirement fund manager, reports that, as of September 30, the total fund was down 17.4 percent on the year, but the return on its hedge fund portfolio was up 3.9 percent, hardly an indication to bail. And at Pepperdine, Pippin stands unequivocally by hedge funds. “Our hedge funds have done what we’ve asked them to do.” Consultants say stories like these prove that their services have value, and some argue that it has only grown as hedge funds have faltered. “When any idiot could throw money at hedge funds and be up 15 percent,” Rosen says, “my services weren’t needed.” Today, he argues, they are. “There’s a good possibility there will be some consultant changes when all this is done.” — TOM FORD, SANTA BARBARA COUNTY EMPLOYEES’ RETIREMENT SYSTEM Managing your business and managing your clients’ capital can’t always be complementary to each other.” The endowment at Malibu, California’s Pepperdine University, a client of Boston-based Cambridge Associates, relies on Cambridge to help manage its alternativeinvestment mandate for hedge funds and private equity. But Pepperdine CIO Jeff Pippin says he brings investment ideas to the Pepperdine investment committee himself. “We’re trying to stay close to our managers,” says Pippin. The endowment’s $700 million portfolio has a 17 percent allotment to ﬁve hedge funds of funds. Pippin, who declines identifying which funds Pepperdine holds, says that although the endowment was down 20 percent for the year through October, its hedge fund allocation was off only about 11 percent. For the ten-year period through the end of October, the Pepperdine portfolio earned a compounded 6.50 percent a year, about 2.25 percent better than its goal — proof to Pippin that over the long term, Pepperdine’s strategy is working. Consultants in general are adopting a better-informed view and keeping a much more skeptical eye on hedge 48 • 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

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.