Andrew Christensen’s career spans a mix of public and private, much like the investment portfolio at Carleton College, where he is director of private investments for the school’s endowment. Christensen joined in the summer of 2008 — “an interesting time to make a move,” he notes dryly — and before that spent nine years working for the Minnesota State Board of Investment, following a stint at American Express Asset Management. Though he primarily focuses on the college’s private equity, real estate and energy investments, Christensen is one of four people on the endowment’s investment team, so he has some exposure to the school’s hedge fund investments. He notes that in the past few years he’s begun to see convergence between the hedge fund and private equity worlds. Christensen recently spoke with Alpha about this trend. Q: Where are you seeing the lines blur between hedge funds and private equity?
A: We invest in a number of multistrategy hedge funds, many of which have side pockets, and through the crisis many of our funds and many limited partners had issues with the amount of side-pocketed assets. I don’t know if people are less sensitive or have forgotten what they thought seven years ago, but it seems like side pockets are back in vogue and are okay with a number of investors. Another way that we have seen the convergence of hedge funds and private equity would be with the activist managers on the hedge fund side. When many of the bigger-name activists come into a deal, it’s with a pretty long-term view. I think there are many aspects there that are similar to private equity, where they try to add value, and we’ve seen cases where they will take a company private if they get enough control. In terms of lines being blurred at the firm level, we continue to see many of the bigger private equity firms launch hedge fund strategies, and some of the bigger hedge fund firms will form a specialized private equity fund of one type or another.
Q: What do you make of the trend of hedge fund managers getting into pre-IPO shares?
A: We’ve seen a number of hedge funds buying pre-IPO shares. We are skeptical there is a way to add value there. With IPO windows being what they can be, I think there are a lot of risks there.
Q: Private equity firms don’t have a great track record with hedge funds. Why do you think that is?
A: It’s a different mind-set, and maybe it’s more difficult than people realize. It seems like many private equity firms that decide to go that route are ones that have gone public and maybe have different economics than what they were used to when they built their core businesses. A lot of the endowments shy away from bigger, publicly traded asset managers. If you’re a state pension fund and you’ve got double-digit billions to put to work and a small staff, you would be interested in finding a firm where you can put a decent chunk to work.
Q: What is the best way for investors to protect themselves from potential pitfalls as hedge funds get more into illiquid investing?
A: As asset classes converge, you need to be more mindful than ever of total portfolio liquidity. We pay very close attention to side pockets, lockups and unfunded commitments on the private side. A consultant expressed the point that many of its clients want that bright line where they view the hedge fund portfolio as money they can call up and get in 90 days. We don’t have that; we have some hedge funds with side-pocket abilities. We run sensitivity analysis to make sure that in another crisis we know where we’ve got liquidity and what it looks like.
