Wednesday, 18 May 2011

A State Pension Plan Hedge Fund Mandate - It Takes a While

American investing institutions are the dominant source of capital for the hedge fund industry. It is important to understand how and why they act. The Wyoming Retirement System just announced who would be managing its assets for its first hedge fund allocations. The winners of the mandates are not surprising, but here the focus is on the process that resulted in those winners. A search of the internet for references to the Wyoming Retirement System and hedge funds allows you to put together a chronology from the headlines:

June 2001: "Wyoming Studies Alts"

…The Wyoming pension fund is planning to make a decision about whether to push into alternatives investments such as real estate, private equity and hedge funds. ..Plan officials are working with the fund's consultant Buck Consultants.

August 2004: "Wyoming Puts Hedge Funds on the Back Burner"

…Wyoming has been slowly continuing its hedge fund education ... and would likely consider a fund of funds to temper its risk…

November 2004: "Wyoming to Decide on Hedge Funds Next Year"

…The plan has been mulling an allocation to hedge funds for more than a year…Mellon Consultants is advising…

March 2005: "Wyoming Appoints PIMCO for Absolute Return Mandate"

March 2009: "Trent May Joins Wyoming as First CIO"

…Trent May joins from hedge fund Deer Creek Capital Partners…

August 2009: "Wyoming Taps NEPC as General Consultant"

November 2009: "Wyoming Considers Its First Hedge Fund Investment"

… The change of tack has much to do with the retention of New England Pension Consulting as an advisor by the retirement system in September…

April 2010: "Wyoming Board Gives Permission to Invest in Hedge Funds"

August 2010: "Wyoming Puts out Combined Search"

…Wyoming Retirement System, is searching for multiple managers to run up to $560 million combined in a global tactical asset allocation strategy and a global macro hedge fund strategy… The system plans to hire three to six managers for a global macro hedge fund mandate, which will make up 30% of the $560 million. Trent May said the number of managers hired for both investments is dependent on RFP responses. The two investments will make up about 10% of the entire portfolio.

As a responsible and accountable public body the Wyoming Retirement System has to make available documentation for its processes and meetings. The source document for the combined search is well put together, and can been seen here.

The selection process uses the Due Diligence Questionnaire (DDQ) as the key screening document. The risk/ return data should reduce the list of all applicants down to long list. And the DDQ can be used to get to a short list that can be evaluated for full-blown due diligence. New England Pension Consultants have put together some great questions to ask in addition to those in the standard questionnaire. They are in the full document for which the link has been given. In this case NEPC have used the Greenwich Roundtable Global Macro DDQ as the starting point – and very good that is too, as are all the Roundtable Guides. The following are extracts from the request for proposals for the hedge fund mandate:

Global Macro Hedge Fund Managers
To be considered for appointment as a global macro hedge fund manager pursuant to this proposal, investment management firms shall have not less than:
  1. $250 million of verifiable total firm assets under management
  2. Two (2) years verifiable Global Macro investment experience

List of Requested Documents & Data

Historical Monthly Returns & Monthly AuM in Excel
Organizational Chart
Biographies of Principles and Investment Professionals
Latest Monthly/Quarterly/Annual Letter & Risk Reports

Proposals will be evaluated and subsequent judgments made taking into account the following criteria:
  • Performance – Return and volatility expectations. While each manager will be evaluated on its relative investment merits the aggregate GTAA allocation will be measured against a 60% MSCI ACWI / 40% Barclays U.S. Aggregate benchmark.
  • Expertise – (a) Similar work performed for other institutions, with references of such funds to be specified in the proposal; (b) Assets under management; and (c) Investment experience broadly defined and experience in global tactical investments specifically.

  • Key PersonnelPersonnel to be assigned to this account, including key professionals, applicable portfolio managers, back-up and other staff assistance, and education and experience of all such key personnel.

  • Fees – Reasonableness and competitiveness of fees.
  • RFP Proposal – Clarity and responsiveness to requirements as requested in the RFP.

  • Philosophy and Style - the extent to which the proposed philosophy and style best complement existing philosophies and styles and meet the requirements and expectations as presented in this RFP.

    Selection Process:
  • All RFP's will be reviewed with respect to the evaluation of the proposal by the Wyoming Retirement System's staff and the Board's investment consulting firm, New England Pension Consultants (NEPC). WRS' Chief Investment Officer, with the approval of the Executive Director, and in consultation with NEPC will be the sole judge with respect to the final selection of the firm(s) hired.

  • Finalists will be notified of the results of the RFP selection process as soon as possible following selection; due diligence visits may be arranged with firms who make the finalist list.

The result of the search is that Moore Capital Management, Graham Capital Management, Brevan Howard, Caxton Associates and BlueCrest Capital Management have each been given $30m of capital, and a further global macro manager is expected to be appointed. Although the RFP gives threshold criteria of at least $250m in AUM and a minimum of a 2 year track record, which give scope for dozens of firms to qualify, it is hard to argue against the selections made. Amongst the five named there is a good variety of style, bias by asset class, and differences in pattern of return. It has taken a while in this particular case, but it is easy to see, given the process, why the hedge fund industry continues to get more concentrated as it is driven by American institutional investor flows.

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