By Anastasia Donde
| Jason Goeller: We have a solid program in place with talented managers |
hile many public pension funds in the United States are just starting to dip their toes into hedge fund investing, the Public Employees Retirement Association of New Mexico dove headfirst into single-manager hedge funds back in 2006.
That was only the beginning for the $11.1 billion pension, which is now pouring even more money into hedge funds and making new investments in brand-name managers. This summer the pension’s board decided to ramp up its exposure to alternative investments from 15% of its total assets to 20%, and as part of that, the pension has increased the amount of money it will allocate to hedge funds to 10.5% of its total assets, up from 7.5%.
To help spend that extra money, PERA, as the pension is known, also topped up its investments in some of the managers already in its hedge fund portfolio and added several new investments as well.
But even though PERA is approaching the 10.5% mark with its new hedge fund investments, its investment managers are not about to sit back and relax. Jason Goeller, PERA’s investment officer for hedge funds, says the pension constantly reviews not only its hedge fund investments but the size of its allocation. “It’s a moving target,” he says, explaining that the size of the overall pension fund is expected to grow, and that the fund will need to rebalance its various investment portfolios throughout market cycles. While the hedge fund portfolio has yet to show significant returns—it has returned only 1.69% since the pension first started investing in earnest in 2007—Goeller and the rest of the pension’s investment staff believe alternative investments in general will pump up returns in the long run..
“They’re looking to have a portfolio that’s not correlated to stocks and earns a premium over traditional asset classes,” says Stephen Nesbitt, chief executive at consulting firm Cliffwater, which advises PERA on its investments in alternatives. After a cataclysmic 2008, when PERA lost 26.25% in its hedge fund portfolio, the pension rebounded in 2009, gaining 26.17% that year.
“We got hurt in 2008, but we bounced back nicely, helping to bolster the overall portfolio,” Goeller says. “We have a solid program in place with talented managers.”
The overall alternatives portfolio has so far performed better, with lower risk, than PERA’s traditional assets, says Nesbitt. Since the program’s inception in December 2006, the alternatives portfolio has returned 1.94% on an annualized basis through October, while the traditional portfolio, consisting of equities and bonds, fell by 0.98%.
PERA’s board voted to invest more in alternative strategies after Cliffwater conducted a study of how the pension was allocating its assets. The adviser recommended that PERA raise its allocation to alternative investments to increase returns while lowering risk, and make room for the move by pulling money out of domestic equities, which often contribute to higher risk and volatility. The pension also voted to allocate 2% to real estate, 3.5% to private equity and 4% to real assets, which include infrastructure, timber and commodities investments.
When PERA first decided to start investing in hedge funds in 2006, the pension bypassed the usual route for first-time pension investors in hedge funds, which is to invest via funds of funds. Instead, PERA went straight to single-manager hedge funds after Cliffwater conducted a series of educational sessions with the pension. The investment staff and board ultimately decided to go direct to avoid the extra layer of fees that funds of funds charge and to be able to tailor the program as they saw fit, with specific weights to different strategies.
“They felt they could get a better understanding and appreciation for alternatives by going directly,” says Nesbitt of the pension’s trustees. PERA’s investment staff also figured that the pension could get access to top-tier managers on its own without having to go through a fund of funds.
In recent years PERA has done just that, bringing on a slate of well-known hedge fund managers to handle significant chunks of its alternatives portfolio. PERA relies largely on Cliffwater to introduce new funds and perform due diligence. The investment staff then approves a short list of managers to present to the board.
“The ultimate decision lies with the board members. They review every investment and are actively involved in the final decision,” says Nesbitt. He adds that the pension has done a good job of educating new staff and trustees on alternative investment strategies.
When it comes to choosing hedge funds for the portfolio, Cliffwater and the investment staff at PERA look for consistent performance, organizational stability, strong infrastructure, a healthy level of assets and high quality in the management team, says Goeller. PERA’s largest hedge fund investments are in U.S. hedge fund firms King Street Capital Management, Wellington Management, Canyon Capital Advisors, Ascend Partners and Diamondback Partners. In October the pension also hired two European hedge funds to fill out the global macro portion of its portfolio, investing $20 million each with London’s BlueCrest Capital Management and Stockholm’s Lynx Asset Management. The firm also invested with another London firm, James Caird Asset Management, which will run its long/short credit fund for the pension. Earlier this year PERA invested $25 million each with New York hedge fund Elliott Management and Capula Investment Management, a fixed-income arbitrage hedge fund in London. PERA also allocated $20 million to another London hedge fund, COMAC Capital, a macro firm headed by former Balyasny Asset Management portfolio manager Colm O’Shea.
PERA decided its exposure to macro strategies was too low, Goeller says, so some of the recent hires were meant to address this as well as help PERA reach its new target for hedge funds.
To that end, the pension gave more money to some of the hedge fund managers already in its portfolio. Claren Road Asset Management and LIM Advisors received an additional $30 million each, while Angelo, Gordon & Co. and Och-Ziff Capital Management Group got another $10 million each. The pension also put another $5 million each into Diamondback and Ascend.
The hedge fund portfolio gained 2.32% for the month of September and 5.29% year-to-date through September. The best-performing strategies this year have been long/short equity, distressed, credit and event-driven, Goeller says. King Street, Diamondback and Anchorage Advisors have delivered the best performance for PERA so far. King Street is up 9.36% through October since June 2007, when it began managing money for the system. The pension hired both Diamondback and Anchorage in November last year. Diamondback has returned 6.44% and Anchorage is up a net 9.4% since then.
While PERA has plowed more than $200 million into hedge funds so far this year, it is also redeeming from one fund and plotting a search for another. The board dropped Farallon Capital Management from its multistrategy portfolio in October because of staffing changes. Four senior executives from Farallon’s value equities team left to launch their own hedge fund earlier this year. PERA had invested $30 million in Farallon, which was its first hedge fund investment, and is planning to search for another multistrategy manager to replace Farallon.
PERA is close to reaching its hedge fund target, but Goeller still expects there will be more movement in the sector. The target for alternatives will stay at 20%, but PERA may invest more in private equity in the coming years, which means it could reduce its investments in hedge funds. Says Goeller, “This is just to bring the overall alternative allocation in balance.” AR
