With much of the hedge fund industry hammered by redemptions, not all investors hoping to dial back their exposure have been able to do so.
To be sure, many have successfully disengaged. The $9 billion Stockholm-based public pension fund AP7, for instance, made a clean break last year with funds of funds, replacing them with in-house replication strategies ( Alpha, May 2008). For Oberlin College in Ohio, on the other hand, a plan to curb its $516 million endowment’s sizable allocation to hedge funds hasn’t gone so well (Alpha, March 2008).
Marcia Miller, chief investment officer at Oberlin, saw reason to pull away from hedge funds in early 2008. At the time, the endowment had roughly 44 percent of its assets in these investments and Miller had begun to wonder whether that was a smart allocation. “Intensifying competition in the hedge fund industry is leading to the gradual degradation of returns,” she noted in March 2008. “When it all starts looking like beta, it becomes less interesting to us.”
She also said at the time that she would push to pare Oberlin’s hedge fund portfolio so that it would be closer to one third of assets. But her plan was hindered by the slow-moving bureaucracy. “Brilliant strategy,” Miller acknowledges today. “Execution was horrible.”
By October of last year, Miller had sought permission from the seven-member investment committee to limit to 3 percent the amount of total assets allocated to each of the endowment’s 12 hedge funds. But the committee wasn’t fully behind the proposal until December. “By that time it was completely too late,” Miller says. “Gates had gone up, and performance had already plummeted. We weren’t able to get out the kind of money we had hoped to.”
The plan was put on hold, leaving Oberlin with 45.4 percent of its assets in hedge funds. Miller explains that it will take time for the dust to settle and that the committee won’t consider reworking the endowment’s asset allocation until September. Members are waiting, in part, to see what new regulations might be imposed on the industry and how reforms might benefit the college, whose overall portfolio lost 28.4 percent in 2008, although its hedge fund holdings were down just 19.1 percent.
At AP7, in the meantime, CIO Richard Gröttheim has presided over a move from hedge funds — which had accounted for about 2 percent of assets, divided between Nyon, Switzerland–based EIM Group and K2 Advisors in Stamford, Connecticut — to a strategy that aims to replicate the returns of hedge fund benchmarks like the HFRI composite index through a combination of stock-, bond- and other security-index futures.
AP7’s replicator, the Goldman Sachs Absolute Return Tracker, lost 12 percent from the pension fund’s initial investment in June of last year through the end of April; during the same period the average hedge fund was down 15.69 percent, according to Hedge Fund Research. But even more than such comparatively strong results, Gröttheim appreciates the new strategy’s relative lack of headline risk. This is something AP7 knows all too well: In 2007 it lost about $1 million when two Bear Stearns Cos. credit hedge funds in the EIM portfolio failed. Says Gröttheim, “It is, of course, a huge advantage for us that we didn’t have any investments in Madoff.”
