Most investors will remember 2008 for its double-digit losses. Anthony Lennie will remember it as the year hedge funds passed muster with him.
“When we got into hedge funds, we didn’t really see it as a big alpha play,” says Lennie, director of finance at Victoria University (part of the University of Toronto) and overseer of its C$200 million ($169 million) endowment. “We just expected that whether the markets were going up or down, these things should perform fairly well for us.”
In the years after the endowment’s initial fund-of-hedge-funds foray in 2002, the portfolio’s two hedge funds were “real laggards” relative to the broader bull market, says Lennie, who notes that the funds placed more importance on protecting against losses than on lifting returns. Unimpressed, he halved the portfolio’s hedge fund allocation to 5 percent.
Then in 2007 the markets began to dip, and, of course, the next year they crashed — and Victoria’s position in hedge funds was finally validated. “What we saw in 2007 and 2008 — which was a great test of these things — was that they did perform the way they were supposed to,” Lennie says. “They beat all the benchmarks and really provided some downside protection.”
In 2008 the hedge fund portfolio — which consists of a medium-volatility fund and a high-volatility fund managed through a single U.S.-based fund-of-funds firm whose name Lennie will not reveal — lost 17 percent, slightly better than the typical hedge fund, which on average declined 19 percent, according to Chicago-based Hedge Fund Research (by comparison, the Standard & Poor’s 500 index was down 38.5 percent).
Making the losses more palatable, however, was the endowment’s year-end foreign exchange accounting from U.S. dollars to Canadian dollars, in which it got a 21 percentage point boost because of the favorable exchange rate. The bottom line: The endowment’s hedge fund portfolio gained 4 percent last year; its overall portfolio was down 5.5 percent.
“Now that we’ve seen that this asset class is doing what it’s supposed to do,” Lennie says, “we’re more committed to going with a full implementation.”
The endowment plans to double its hedge fund exposure over the next few months, to 10 percent of its portfolio, taking some assets out of equity. (In addition to its current 5 percent hedge fund allotment, the endowment devotes 50 percent of its assets to real estate, 35 percent to global equity and 10 percent to fixed income.)
Lennie says that giving the expanded mandate to its incumbent fund-of-hedge-funds manager is a possibility, but that the endowment will cast its net wide and consider other managers too.
