New Mexico lowers hedge fund exposure in favor of more liquid alternatives

The state’s pension for public workers is cashing out of some hedge funds to make room for what it calls liquid alpha strategies.

The New Mexico Public Employees Retirement Association has tweaked its absolute return investment strategy, lowering the amount it plans to invest in hedge funds and increasing the amount it will allocate to what it calls liquid alpha strategies.

The pension adopted the plan last month. The investment staff of the $12.4 billion retirement system, which handles assets on behalf of New Mexico’s public workers, decided to decrease its allocation to absolute return strategies (a portfolio that includes the retirement system’s hedge fund investments) from 9 percent of total assets invested down to 7 percent. This reduction takes into account the fact that New Mexico is already in the process of cashing out of some of its hedge fund investments, so it likely will not have to make any fresh cuts.

The pension will also invest 5 percent of its assets in liquid alpha strategies, which it says can encompass several different asset classes and tools, like derivatives or shorting, but are usually more liquid and less expensive than hedge funds.

The pension wanted to pursue liquid alpha because “it would give us more flexibility with some different types of strategies that don’t fall neatly into hedge fund arena,” says Jason Goeller, investment officer for hedge funds at the pension.

These could include so-called risk parity strategies, which allocate capital tactically among different types of investments based on their risk profile in a given market environment, or global tactical asset allocation strategies, such as Bridgewater’s All Weather portfolio, for example. These strategies usually operate with broader investment mandates than traditional investments and also have lower fees and less stringent liquidity terms. PERA hasn’t made any investments in this area yet but plans to do so in the coming year. The remainder of the allocation will be funded by slight reductions to other equity portfolios.

The pension notified New York-based hedge fund firms Eton Park Capital Management and Marathon Asset Management in September that it will be redeeming for performance reasons. New Mexico had about $63 million invested in the Eton Park LP fund and $40 million with the Marathon Special Opportunities Fund LP. The Eton Park fund lost 11.15 percent last year but is up 7.8 percent this year through October. Marathon lost 4.75 percent last year but has gained 13.78 percent this year.

The retirement system still has small amounts of money remaining with a handful of managers that it decided to redeem from over the past year or so for a variety of personnel or performance reasons. These included GoldenTree Asset Management, Diamondback Capital Management, Glenview Capital Management, TPG-Axon, Farallon Capital Management, Stark Investments and James Caird Asset Management, which opted to close its flagship hedge fund last year.

Glenview Capital Management Diamondback Capital Management New Mexico GoldenTree Asset Management James Caird Asset Management
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