Managing Director, John D'Agostino observations from the semi-annual SACRS (State Association of County Retirement Systems) conference.
The SACRS Conference:
- 20 California pensions represented (out of ~40 major public pensions in the state)
- Majority of state pension assets represented at this conference (>1T)
- CIOs and Trustees attended
While we are all aware that our industry currently faces some headwinds, our observations indicate that there had never been a better and more crucial time to educate the industry on the need for hedge funds and the role they play in achieving stable uncorrelated alpha.
The following are summary takeaways from discussion with conference attendees. Of course, these are observations culled from a fairly small sample set.
Hedge funds should consider a flexible, customized approach when targeting pension funds, one that emphasizes transparency and isolates the exposures pensions funds seek (i.e. fund of ones and co-invest opportunities):
- Almost all Trustees polled (19 out of
20 pensions in attendance) stated that direct investments into
pooled hedge funds vehicles were likely to be stable to negative
2016/17. Trustees cited:
- Below expectations for performance
- Need to increased transparency
- Headline risk (not
just related to negative performance but also to fees paid on
- CIOs are interested in customized alpha, but struggling to get deal flow past skeptical trustees. They have an easier time selling a customized product, managed account, Fund of One, etc than a pooled vehicle, to a Board of Trustees.
- Private Equity viewed very differently than hedge, not considered "alternative" by trustees. Lower headline risk. Despite the fact that total fees paid to PE can be greater than hedge, they are viewed as less expensive.
- Emphasis will be on low fee strategies for beta and PE/co-invest with hedge funds for alpha
- Pensions are moving away from being "slow sticky" money. Will still maintain long investment duration but more willing to be nimble
- For example, consulting firm and portfolio turnover has increased
- To enable flexibility some CIOs are pushing for "MCA" – Master Custody Account – an umbrella account that the Trustees approve for a given fund complex. The CIO can then trade within that account across the fund complex without having to go back to the Board for approval. This requires the manager to permit liquidity across its products with little to no limitation. May run afoul of certain MFN agreements despite the MCA having a single beneficial owner.
- Co-invests are preferable to fund investments. Increased transparency and customization.
- Credit/yield strategies (>5 years duration ideally 10-15 years) are by far the most sought after
There is significant distance between how Trustees and CIOs view hedge funds:
- Trustees and CIOs view the risk and benefits of hedge funds differently, with Trustees focused more on the public relations perception.
- Trustees and CIOs were asked to
identify their primary risk/concern with hedge funds:
The majority of Trustees cited headline risk as their top concern. Notably, this headline risk is no longer the risk associated with losses/fraud. It is now the general risk associated with a media focus on hedge fund behavior even in positive environments (ie Puerto Rico debt, fees paid on positive performance, etc).
- Trustees repeatedly requested that the industry try to repair its public image.
Pensions are under increasing regulatory pressure with regards to governance and perceived conflicts:
- In the US and globally, increased fiduciary requirements are increasing risks to both IMs and pension trustees
- For example, the FCA is requesting that pension funds provide identifying information for both staff and trustees (Board) in certain situations where they are invested in UK domiciled funds and the FCA has deemed their investment a "control" investment. The FCA has not provided a specific % threshold that makes an investment a control investment, but has indicated through the GP that a reduction to less than 10% may not solve the problem. They were not clear whether this meant initiating a 10% position would qualify as control, or whether in this instance a dilution down to 10% would not be sufficient to remove control given the size or quality of the initial investment.
- FCA reached out to the pension fund (through the GP) and requested identifying information for the pension fund's Board. After refusing this request, the FCA notified the GP that their registration status could be revoked unless the pension fund complied. It is not clear whether the implications of this would be an inability for the GP to market the fund further or more serious limitations on trading activity.
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