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Lawrence KochardUVIMCO, Tiger ManagementThe son of a stockbroker, Lawrence Kochard has always had an interest in investing, but it wasn’t until he was teaching at the University of Virginia in the late ’90s that he started pursuing it professionally, as a member of the investment advisory committee of the Virginia Retirement System. He joined VRS full-time in 2001 as head of public equity and built the $40 billion pension system’s hedge fund program. Three years later Georgetown University hired Kochard, who has an MBA from the University of Rochester and a Ph.D. in economics from UVA, as the first CIO to manage its then-$750 million endowment. By the time Kochard left Georgetown to return to his alma mater, in 2011, the endowment had grown to $1.2 billion, including a sizable allocation to hedge funds. In his current role as CEO and CIO of University of Virginia Investment Management Co., the 60-year-old Kochard and his 38-member team oversee $7.5 billion in long-term assets. Leveraging the school’s network of graduates who have gone on to become successful hedge fund managers — including several who worked at Julian Robertson Jr.’s legendary Tiger Management Corp. — UVIMCO has long invested in hedge funds. Kochard, who teaches a class at UVA called “Case Studies in Investment Management,” has no intention of changing that.
Did you have much experience with hedge funds before the Virginia Retirement System?
Kochard: No. It was kind of an evolution. When we were at VRS, there were a number of public equity managers, so it wasn’t a big leap for us in terms of investing in long–short equity. That was our focus. To this day, if you look even here at what I’ve done, I have a greater appreciation for long–short equity managers — between my network and I think the ease of understanding what they’re doing.
When you were at Georgetown, was your approach to investing in hedge funds similar to what you did at VRS?
Yes and no. A, you had to be different because you were so much smaller, and B, you’re not going to have as many manager relationships. The challenge for a large investor is just how many relationships you need to have, and at some size the question is, Is it really worth it? The one thing that’s been clear to me from the get-go is that there’s only a small percentage of the managers you want to invest with. Really, most of the good managers are capacity-constrained. That really limits your ability to scale it. Then you go to a small institution, assuming you have any capability there, and it actually becomes really interesting.
But what that means is it makes sense to have it more concentrated in terms of number of relationships. Where we are now here at UVIMCO, we’re kind of in-between. When I left VRS — I can’t remember the exact asset size, but it was probably $40 billion. Then, go to Georgetown, under $1 billion, and then come here and you’re $7.5 billion — at least, now we are. With each of those sizes, there’s different nuanced things because ultimately all you’re really trying to do is get into great investors. They’re all closed, they’re capacity-constrained, and you’re always limited in terms of how much you’re going to get out the door.
When you came to UVA, what sort of portfolio did you inherit?
I inherited a very good portfolio. UVA was early doing a number of things. That’s really an enormous benefit. Part of what you do, and literally anything we invest in, whether it’s hedge funds or private equity, is find really good groups and then stay with them as long as you can until their circumstances change — meaning they’ve gotten too big or they’ve had turnover or the fees start getting too high.
There’s an inevitability that managers all get bigger, especially if they do well, because the capital is going to compound, but the goal is to be with people for a long time. We’ve done that as a group. There are relationships that we have that go back 20 years. But then there are some that are great but the circumstances change.
There’s no need to change things dramatically. It’s really just trying to constantly stick with what was working to a point but constantly also be open-minded if something changed that would cause us to want to really dial back a strategy or a manager. You constantly have to be trimming or adding. We’re looking for managers that have skill at security selection on both the long and short side. That’s got to be really good to overwhelm what are, as you know, high fees.
How much of your portfolio do you allocate to hedge funds?
We don’t view hedge funds as an asset class. We have three broad asset classes: equities; what we call real assets, which are mostly resources and real estate; and fixed income. The last class includes marketable alternatives and credit hedge funds. The credit funds have a broader opportunity set than just equities; they generally are going to hold up a little better in a downturn than the long–short equity funds, which are within equities. We have a target allocation to a risk level that’s equivalent to that 60-30-10 mix of equities, bonds and real assets. We have an overall allocation at the fund level to a mix of funds that have the same level of drawdown risk, without having a target to anything. It allows us the freedom to just find what we think are truly extraordinary investors without having to force an allocation.
If you looked at our long–short equity, since I’ve been here it has varied somewhere between 20 to 25 percent of our total fund. The credit-related funds have varied between 10 and 12 percent. In aggregate, hedge funds represent a third or more of the total portfolio.
How does UVA’s portfolio compare with those at VRS as far as the favorability of the terms and the fees?
Honestly, I know with hedge funds being less in favor and a lot of the large pensions pulling back or negotiating pretty hard, we’ve seen some slight improvement in terms, but if it’s a manager that we think is truly extraordinary, that can generate the kind of returns we need after fees and that we can be with in good size, that’s something where we’re not going to negotiate hard on fees. With managers that are less well known, where we’re going to have fees that we think are reasonable to support the organization for doing quality work and they get paid a performance fee when they do well, those fees may be a little lower than the kind premier managers charge.
Still, it’s hard for me to contrast where we are now versus where I was at VRS because they are very different times and they’re very different capabilities that we have with getting into premier managers. So it’s almost an apples-and-oranges comparison.
UVA is the alma mater of many Tiger Cubs, including Lee Ainslie and John Griffin, who worked for Tiger founder Julian Robertson and went on to launch their own successful hedge fund firms. Does UVA tend to have a lot of Tiger Cubs in its portfolio?
We don’t reveal our manager names, but I will say it’s been a powerful network for us — not only just Tiger and Tiger Cubs but managers that are part of that broad network of being influenced by the way they’ve invested. That’s been, I think, a very valuable network for us, both in terms of sourcing as well as doing diligence on managers.
Are you competing with hedge funds for investment talent?
No. Let’s put it this way. What’s going to be a typical undergrad student’s path to getting to a hedge fund? You go to a top university. You have an interest in finance and investing. You do really well. You get hired by Goldman Sachs. Then, after a couple of years or probably during your first year, you get interviews and then you get hired ahead of time to go work either at a hedge fund or a private equity fund. You do that for a couple of years. You go to Columbia, Stanford or Harvard business school, and then you go back to maybe that same fund or maybe another fund.
That’s a great path, but the path that we can offer, which I actually think is as interesting, is to come here. Get some sense of pattern recognition of what the best investment managers in the world look like and then start really understanding. We do a great job of underwriting the qualitative aspects of the people of these organizations. What are their incentives? Why are they great investors? Are they just great people? Can they run a business?
The other thing that we do is really look at a manager security by security and try to re-underwrite the positions that they have to understand why are their views differentiated from other managers that we would not deem to be quite as good. We spend a lot of time thinking about these individual companies— more so, probably, than some other LPs.
We’re not managing our own in-house public equity portfolio, but we do a lot of individual work on both public companies and private companies to really help us with the recognition of what it takes to be a great manager. So I’m not really worried about someone poaching our talent. We’re constantly trying to develop this talent.
How has the industry changed since you began investing in hedge funds 15 years ago?
I think there are fewer instances of someone deemed to be this premier manager that you have to invest in. There were so many more of these kind of large launches and the universe of what would be deemed to be this can’t-miss fund that you have to get into; I think the frequency of those is less. But they still do exist, and part of what we still do is try to understand when there is a launch, which of those you really want to take a pretty hard run at. But there are fewer of them in terms of premier managers.
When they do launch, I think people have realized they should be a little more modest in their expectations. They shouldn’t try to create this instantly global firm with offices in several cities and investing across everything. It should be much more focused, with an understanding of how difficult it is to build that organization out of the gate. I think that’s been reduced.
How has that affected UVA’s portfolio?
The types of managers in which we’re invested, I don’t know how much has really changed because they’re all closed. Part of what we’re trying to constantly do is, for those closed managers that we’re not invested with — that we actually think there might be a future where we could get invested — to continue to have this dialogue with them.
What’s changed are the really big hedge funds that had done extremely well in terms of fundraising, that have gotten a lot of money from large asset owners, including pensions and sovereign wealth funds. That’s where there seems to be a change. That’s not going to be the set of managers with whom we have relationships. I don’t necessarily see that impacting us or impacting our managers. But there are clearly large institutions that have been impacted — large institutions that are heavily reliant on funding from pensions and funds of funds.
I think also what’s changed is the fund-of-funds business. This has been going on for years. There’s kind of a handful of smaller players that have their niche, that have done really well investing in emerging managers; I think they still have a role going forward. And then there are the megafunds, like Blackstone, that have done extremely well in terms of managing their business. But I think there are a lot of players in between that face a lot of challenges.
What’s your view on hedge fund performance?
It depends what you define as performance. I’ll start with the notion that people had the incorrect idea for years that if there was this kind of one-line description of what expectations should be for hedge funds, it was “equitylike returns, bondlike risk.” I think that’s way too simple and too much of a free lunch.
What I’ve always looked for, even going back to my VRS days, is an expectation that on a risk-adjusted basis hedge funds would deliver outperformance for true alpha that was going to be better than, or at least as good as, managers in, say, long-only — just because they are attracting better talent at the extreme and they have an ability to add value episodically on the short side. That’s the key, being episodic. They’re not always this sort of constant stream of great short opportunities. We’re constantly trying to reassess: Have the shorts gotten too expensive to execute? Have the managers gotten too big to short? Is there something that it’s just not the same game and it’s permanently over? Or it’s permanently over for a certain manager? Then we have the flexibility to change our view. So we’re constantly reassessing, but I do think our long–short managers as a group are achieving the broad objective.
Has the balance of power shifted from managers to investors?
Again, it’s hard to generalize. I think with the managers that we have, it’s at the right level because if it’s not the right balance of power, we wouldn’t have invested with them.
“Power” is, I think, the wrong term. It’s really “relationship.” What we’re trying to forge are close relationships such that we at all times have access to the manager to have an understanding of what they’re doing. Getting back to my original notion — which is underwriting the people, underwriting the underlying investments, making sure that you have enough transparency into that to be able to constantly reassess whether your original hypothesis of why you forged this partnership was correct — for us it’s all about relationships, as opposed to thinking of it in terms of power.
How has teaching helped you as an investor?
The best thing about teaching is — and people have said this for years — you never know a subject as well as you do when you’re forced to teach it. It’s the notion of trying to explain to students what is the essence of different strategies, different managers, what you are looking for, how does it all fit together. The other benefit we get is that we hire UVA students right out of school, and former students that have had a career in finance and investing. The value to UVIMCO is, again, constantly broadening our network of people. It’s a pretty virtuous circle. •
