Bucking Trend, NY Common Fund Goes Further into Hedge Funds

(November 5, 2009) – The New York State Common Retirement Fund is bucking trends and plowing money into hedge funds while avoiding funds of funds.

The $116 billion fund, rocked by recent scandals over kickbacks and placement agents, plans to move upward of $1 billion into such alternative vehicles by the end of 2010. In 2008, most hedge fund indices were down almost 20%.

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Currently, the fund has almost $3 billion invested with single-manager hedge funds, according to Crain’s New York Business. This move signals a further move away from hedge funds of funds, which, until 2008, captured about 80% of the Common Fund’s hedge fund allocation.

“We took a look at the portfolio, and realized there was major overlap and redundancies,” a spokesman for State Comptroller Thomas DiNapoli said. “We figured there were places where we could go direct to the hedge funds and eliminate the fee.” The spokesman cited fee reductions and eliminating investment overlap as two of the reasons for the continued move away from funds of funds. Notably, David Swenson—the Yale endowment chief and unofficial dean of endowment investing—has been quoted as calling funds of funds “a cancer on the institutional investment universe.”

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

With poor returns and liquidity issues, endowments—heavily reliant on private equity in the past—say they will lower allocations to this alternative asset class.

(November 5, 2009) – Many endowments are altering their private equity strategies after severe drawdowns in 2008.

According to London-based research firm Preqin, 57% of endowments altered their strategies relating to private equity after the onset of the financial crisis. Nine percent said they were postponing any future investments in the alternative asset class; 14% stated that they planned to lower their allocation over the long term. Somewhat surprisingly, considering their recent reliance on what many refer to as the “Yale Model”, larger funds—those with more than $750 million—were the most likely to be considering reductions. Only 30% of all endowments planned to counter this trend and increase allocations over the next five years.

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Historically, endowments have been more likely than other asset owners to invest in private equity. However, with less debt available and an increased focus on liquidity, endowments have been widely expected to lower their exposure to the asset class.

This trend has been seen as of late in the more media-garnering American endowments, such as Harvard and Stanford. Both university funds have, in the past year, attempted to sell private equity commitments on the secondary markets. Harvard’s attempt, notably, was met with minimal success.

The survey was conducted with 100 endowments, the vast majority of whom are based in the US.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>