Burned by a nearly $1 million loss through a Union Bancaire Privée fund of hedge funds that invested with Bernard L. Madoff Investment Securities, the Knoxville [Tennessee] City Employees Pension Fund has pulled the remainder of its $16 million investment with the Geneva-based banking giant. But that doesn’t mean it has gone sour on hedge funds.
“This has not changed our opinion of hedge funds at all,” says Michael Cherry, executive director of the $330 million fund, which lost 20.81 percent last year (compared with the 24.91 percent average public pension loss, according to Santa Monica, California–based Wilshire Associates). The system plans to hold firm to its 7 percent allocation to funds of hedge funds.
On March 31, Knoxville redeemed its holdings with UBP, which had $700 million of its clients’ assets invested with Madoff and is one of two fund-of-funds firms Knoxville had in its hedge fund portfolio (the other relationship, with New York–based Cadogan Capital, is intact). The system’s board of directors was undoubtedly shaken by the Madoff fiasco but demonstrated a determination to stay with the fund-of-funds model by promptly hiring St. Louis–based consulting firm Summit Strategies Group to begin a replacement search.
At a March meeting, however, the board tabled a plan for a portable alpha program, a strategy that strives to create alpha by juicing broad index returns through the use of derivatives. Cherry says Summit recommended moving away from the idea because there were less expensive alternatives.
“With all that has happened in the market, there are some really good opportunities just in equities and bonds, with everything having gotten so cheap,” Cherry explains. “We’re going to be able to get the return we’re looking for without having to go to a portable alpha arrangement, which entails higher fees.”
The board also reversed a previous decision to liquidate the plan’s convertible bond allocation — opting instead to maintain its commitment. In addition to its hedge fund holdings, the Knoxville system allocates 42 percent of assets to domestic equity, 21 percent to international equity, 15 percent to fixed-income holdings (including convertible bonds), 10 percent to real estate and 5 percent to private equity.
