By Susan Barreto
All of us in the prognostication business agreed that 2012 was
the year that returns would matter, but little did we know that
the hedge fund allocations would continue to grow despite weak
performance across the board.
Like Icarus flying too close to the sun, investors have
learned a little bit about flying to the giddy heights of alpha
possibilities, and how hard, and indeed fatal, coming down can
be. In the US, institutional investors of all types have
reported hedge fund returns averaging less than 1% a month in
In cases, such as at the Illinois Teachers' Retirement
System and the Pennsylvania Public School Employees Retirement
System, hedge fund returns for the year ending 30 September,
2012 hovered at a dismal 3%. At the New Jersey Division of
Investment (see story on page 10) returns for the year ending
31 August 2012 fared slightly better at 4.54%. The State of
Wisconsin Investment Board, meanwhile, posted a return of -1.4%
for the first year of investing (see page 8).
This is a far cry from where we were in 2011. According to
research from consulting firm Cliffwater, the strongest hedge
fund portfolio returns for the year ending 30 June 2011 were at
Mississippi Public Employees (26.8%), Missouri Public School
Employees (18.8%), Missouri Public Education Employees (18.2%),
California State Teachers Retirement System (13.6%) and
Pennsylvania Public School Employees (13.2%).
At the end of 2011, InvestHedge was concerned that the
passive investing driven by a handful of consultants of large
institutional investors could lead to a detrimental sell-off of
underperforming hedge funds, which in turn could impact other
investors. While some hedge funds experienced significant
redemptions this year, these managers were not put out of
business as the majority of new institutional mandates still go
to firms with $1 billion or more in capital.
What has changed in the past year is that institutional
investors are not shy about becoming a greater percentage of a
manager's assets. Trustees revamped their policy allocation at
the University of California (see story on page 8) in a bid to
allocate to smaller managers.
But for all that new-found freedom it remains to be seen
whether or not new smaller managers will be a compelling sell
to a group like the University of California. A staffer at
another US endowment sees the argument of being a significant
investor in a smaller manager as potentially risky, especially
when it comes to revenue sharing and possible headline risk
should a hedge fund go out of business.
The New Jersey Division of Investment prefers to make a
minimum $100 million investment in a fund to get some benefits
of scale, according to CIO Tim Walsh. However, he does not want
to hold 20% of a fund, so most managers with $500 million in
assets or less cannot be considered.
Global hedge fund firms with $1 billion or more in assets
seem to be firmly entrenched in the institutional marketplace
despite some troubling performance figures. The truth of the
matter is as funds of hedge funds and other investors such as
Ohio SERS continue to rebalance portfolios (see Ohio SERS, page
5), the ability to know whether a single investor's investment
has grown overnight to 50% of a fund is difficult to track.
Knowing where fellow investors are allocated has never been
so valuable. But what will be even more precious in 2013 is
sustainable alpha. Until hedge funds prove their worth to the
institutional investor's bottom line, the future growth of the
industry remains uncertain.