David Weaver is no creationist, certainly not in the fiscal sense of the word. The portfolio he manages for the Kansas State University Foundation changes through “evolution, not revolution,” he likes to say.
As vice president of investments for the $340 million endowment, Weaver has lived stringently by that mantra in these times of market discord. Never has he been more vigilant about the managers he picks.
“Our strategy is to attempt to anticipate market events and construct the portfolio to be ready, not tempt chance in the midst of turmoil,” he explains.
Since 2000 the foundation has separated its hedge fund allocation into two distinct groupings: long-short funds and absolute-return funds. The first category, of course, consists of managers who invest primarily by taking both long and short positions on stocks. The absolute-return portfolio houses managers pursuing merger arbitrage, relative-value and distressed-debt strategies. This distinction allows the endowment the benefit of two countervailing plays, Weaver explains.
“We want strategies in the portfolio that will give us protection in a down market, because we have a very low allocation to fixed income,” Weaver explains. “Absolute return does that. The long-short funds are there for another reason — to be a return enhancer and a volatility reducer.”
He appears to have struck the right balance.
The KSU Foundation’s return for its fiscal 2008, which ended June 30, was 1.46 percent (foundations and endowments, on average, lost 4.7 percent over the same time period).
In July the foundation added two more long-short equity hedge funds to its roster, rounding out the asset class. Weaver says that for the first time since he established the long-short category eight years ago, the portfolio offers the diversification and risk level he has sought. He refuses to disclose which funds he invests in, however.
The university, whose main campus is in Manhattan, Kansas, has kept its absolute-return and long-short equity hedge funds separate since it ventured into the asset class in 2000 by carving out a 5 percent allocation and directly investing in a half dozen or so funds.
Weaver wanted to see the allocation grow, but he didn’t want to do it in a headlong way, so he built it slowly: The endowment’s hedge fund portfolio invests directly now with 16 managers and one fund of hedge funds, and it accounts for 18 percent of the endowment’s total assets (14 percent in long-short equity and 4 percent in absolute return).
Overall, assets — in addition to those harbored in hedge funds — are split into traditional long equities (20 percent domestic, 18 percent international), private equity (15 percent), inflation-hedging assets like real estate and oil (18 percent) and deflation-hedging assets like long-term bonds (11 percent).
Weaver joined the endowment 23 years ago, when its portfolio was comparatively basic, consisting solely of stocks and bonds. But time and faith combined forces, and change ensued.
“We increased the allocation [to hedge funds] as we got comfortable with the strategy,” Weaver recalls.
What else has happened as new hedge fund characteristics and strategies have emerged or, to put it another way, as evolution has set in?
“We gained confidence in our ability to identify good managers and monitor them,” he says.
