And How Have The Internal Processes Developed At The Endowment To Invest In Hedge Funds?

One of the best things about the flows into the hedge fund industry coming from American investing institutions is that a good proportion of them are from public bodies. Consequently there is very good transparency about the activities in the hedge fund sector of state pension plans, for example.

Through the annual NACUBO study it is feasible to track quantitative information such as allocations to and returns from hedge funds in aggregate across American college endowments.  There can sometimes be good qualitative information about the hedge fund investment programs of college endowments because of the requirement to be publicly accountable. So it is that we can get an insight into the Absolute Return Strategies process at the endowment of the University of California - through the availability of Board papers from the Regents Office.

For a Board Meeting in February this year the hedge fund consultants to the Regents, Albourne Partners, were asked to prepare a memo giving their view of the Manager Selection processes employed in the construction of the UC Absolute Return portfolio, and the competence of the UC Absolute Return Investment Staff. What follows is a lightly edited version of the memo.

The Memo to the Board shows how the investment process for investing in hedge funds evolves at an investing institution. It also gives a real world example of the impact of constraints put on an investment mandate. The limitations of manager size and desired liquidity (ability to deal in the funds) are cited.  The Memo reflects the move away from large multi-strategy managers to try to allocate to emerging managers. And manager fees have been negotiated.

To read the rest of the story click here.

Fortress' Logan Circle At The Tipping Point

Across its funds businesses Fortress Investment Group has put in some good returns this year, including from its hedge funds.  Should the superior returns continue, the Group will be well placed to give better profitability to its investors, not the least from Logan Circle, the institutional fixed income manager acquired in April 2010.

The second quarter results from Fortress reflected the significant shift in the split of AUM that has taken place over the last year within the group. Logan Circle continued to accumulate assets at a faster pace than the rest of Fortress Investment Group. At the end of June the Logan Circle AUM were up 40% y-o-y at $18.1bn, well ahead of the Private Equity ($13.8bn) and Credit ($11.5bn) segments of the business in absolute size and growth rates.  AUM in the remaining segment, Liquid Markets, were down 30% y-o-y at $4.4bn.

For comments on Fortress' hedge fund returns, the Group's view on credit markets globally, and a view on the implications for Fortress Investment Group of Logan Circle reaching a tipping point see the rest of this article on "Hedge Fund Insight"  

Specialist Manager Series - Selecting Healthcare Stocks with Rhenman & Partners

Selecting Healthcare  Stocks

 

“Hedge Fund Insight” features a series of articles to share the expertise of specialist equity managers. The second looks at the approach taken by Rhenman & Partners Asset Management AB of Stockholm, which specialises in healthcare shares in the hedge fund format.

 

 

The requirements of institutional investors in hedge funds can be taxing. They can dictate the terms of business to a hedge fund; they can take nine months of exhaustive due diligence, and large investors have raised the bar across the industry in terms of the rigour of infrastructure and reporting standards they need.

Although survey evidence suggests that the largest American pension plans are considering investing in funds in the $500m-$1bn category, there is not much sign of the capital flows there yet. Investing with smaller, less-well resourced fund management companies will usually require a compromise on standards in some area for an institution. Why would a large insurance company or Endowment go to the bother of having to lay out the inevitable caveats in the proposal to the in-house investment committee?

The answer in one word is performance, in two words is alpha generation and in three words is pattern of return. Investing institutions need to tap into the higher return available from younger, smaller hedge funds, and for which academic studies provide good evidence. The security of management companies’ operating systems is a necessary hygiene factor in hedge fund investment programmes, but they do not justify the effort of investment consultants, funds of hedge funds, advisors, due diligence out-sourcing companies, third-party risk assessors and the dedicated internal investment professionals working on behalf of a state pension plan. Helping to meet the plan desired return target does.

One of the hedge fund investment strategies that give flexible utility to large investing institutions is sector long/short equity funds. The products of sector hedge fund managers can be used in core/non-core structures, in funds split along active/passive line, and where alpha generation is explicitly separated from beta exposures to markets/asset classes. A specialist technology long/short fund could augment a large cap or small cap allocation in a pension fund, or be a substitute within a number of domestic/global equity mandates. Also the investment processes of sector funds should be culturally acceptable to institutional investors as they are always dominated by the application of fundamental research, which meets the preferred bias of the big investors.

A good example is the Rhenman Healthcare Equity Long/Short Fund run by Rhenman & Partners Asset Management AB of Stockholm. Read on

Update of 3rd August

These stories have been posted on www.hedgefundinsight.org:

http://www.hedgefundinsight.org/gross-staff-turnover-is-not-the-issue-at-citadel/
Citadel LLC, the $11bn AUM Chicago-based hedge fund group, has produced some great returns for investors over the long term. In the last calendar year, the two main multi-strategy funds, Kensington Global Strategies and Wellington Fund, both racked up gains of more than 20%. But Citadel has another reputation, aside from very good returns...

http://www.hedgefundinsight.org/opinion-some-reasons-swfs-will-not-buy-hf-management-companies/
A recent article suggested that SWFs are exploring the possibility of buying asset management companies. Could hedge fund management companies be on their radar? The reasons given for buying asset managers are two-fold: to reduce fees and to ramp up investment expertise.

http://www.hedgefundinsight.org/avenue-capital-backs-punch-taverns-and-travelodge-debt-to-recover/
A recent article in the “New York Times” made a a big play about Avenue Capital’s strategic allocation of capital to Europe, which meets  the opportunistic and value-driven approach of founder Marc Lasry. The $3bn of capital is expected to be committed for 3 to 5 years, but is being drip-fed in at roughly $150m  a month .

http://www.hedgefundinsight.org/gradually-and-then-suddenly/
Markets are funny places, and the things that happen there stranger still. Economic data has been getting steadily soggier from around the world and the eurozone crisis rumbles on, yet global bonds, equities and commodities have turned in sprightly returns for July.

http://www.hedgefundinsight.org/event-driven-is-a-strategy-for-todays-erratic-markets/
In these treacherous times the degree of macro risk in markets is substantial and it is tempting to try to capture these opportunities. The confident macro trader will certainly argue for the opportunity while the fundamental investor may be confounded by factors beyond their considerations. One of the more controlled ways of investing in the current environment is event driven strategies.

http://www.hedgefundinsight.org/short-selling-spuriousness/
On Monday, July 23rd 2012 2 Euro Zone nations acted in a manner that revealed panic and questionable judgement. In an attempt to prevent “speculative” trades depressing asset values Italy and Spain reintroduced a ban on short selling. This was a response to the tumble in the equity and bond markets.