Joshua Kaplan, director of investments at Drexel University, is familiar with less-than-reassuring truths, like the fact that global hedge fund losses surpassed $150 billion in October alone — $115 billion from performance and $41 billion from redemptions, according to Chicago-based Hedge Fund Research. But he remains undeterred in his plan to allocate 19 percent of Drexel’s $490 million endowment to hedge funds. At a time when many, if not most, investors see every reason to bail, Kaplan sees opportunities.
“The hedge fund world in general is doing a heck of a lot better than the equity market,” notes Kaplan, 34. “Hedge funds are a much more advantageous place to be through this market turmoil than long-only positions.”
Kaplan is the first official director of investments at the Philadelphia school’s endowment. Before his arrival in January 2007, portfolio decisions were made by the university’s eight-member investment committee, CFO Thomas Elzey and Boston-based consulting firm Cambridge Associates. The endowment had avoided hedge funds.
Kaplan, who was CIO at Smart Financial Advisors, a multifamily wealth management office outside Philadelphia, is a devotee of diversification and doesn’t believe in concentrated bets. He errs on the side of being conservative and emphasizes downside volatility, trying to quantify potential drawdowns. Kaplan says he’s never going to put all his eggs in one basket. Two years into the job, he has hired an investment analyst and plans to bring in another within the next few months. He is also fleshing out the overhauled asset allocation he proposed and which the board approved in May.
“What the new policy did was two things,” explains Kaplan. “It set an allocation goal that was more in line with our peers’, and it gave us flexibility to be more opportunistic and efficient within our allocation.”
He says the change boosts exposure to three areas: hedge funds, private capital (private equity, venture capital and leveraged buyouts) and real estate. Kaplan plans to fund these expansions by cutting investments in domestic equity and bonds. He has already reduced equity to 40 percent from 70 percent and expects to trim the current 20 percent bond allocation by one third. About 10 percent is allocated to cash and 30 percent is in a combination of private equity, venture capital, real estate and hedge funds).
Kaplan’s first priority: hedge funds. He expects eventually to expand from two to roughly 20 managers in the endowment’s hedge fund allocation and plans to forgo funds of funds in favor of direct hedge fund investments to avoid the extra layer of fees. Kaplan says that issuing requests for proposals isn’t part of the new-manager hiring process. He hopes to find managers instead by networking, attending conferences, searching databases and even responding to cold calls.
In July, Kaplan hired the endowment’s first hedge funds, though he won’t divulge their names. They are multistrategy funds that each account for about 2 percent of the portfolio. With their relatively conservative and largely above-board characteristics — they use little or no leverage, are registered with the Securities and Exchange Commission and have strong risk management capabilities — these funds fit well into what Kaplan calls the portfolio’s “core positions.”
“The plan is to build out these positions — our anchor managers — to initiate the allocation in our hedge book,” he says. “As we move along we will surround those core positions with more strategy-specific niche managers.”
Kaplan originally envisioned the endowment’s next step as a move into long-short equity hedge funds, but the seize-up in the credit markets sidelined that plan because other plays looked better. “We just recently decided to move our distressed-debt search up the priorities ladder,” he notes. “The opportunity there is just so great that it should supersede all other searches.”
It was this very ability to be opportunistic and take advantage of timely prospects that Kaplan had in mind in May, when he proposed the new allocation breakdown and helped put together a new Web site to go along with it. The password-protected site, meant solely for Drexel investment committee members, features articles, white papers and memos that explain what Kaplan and his staff are looking into.
The Web site also includes an “action items” section, which lists potential portfolio changes and gives committee members up to five days to dissent. If no objections arise, Kaplan and his team move forward. “It allows us to be a lot more proactive and make changes when we feel they should be made — and not have to wait for a formal quarterly meeting.”
