Hedge funds and funds of funds are seeing an increase in redemption notices as the industry plunges deeper into the red amidst regulatory constraints and the global credit crisis.
And while hedge fund managers are watching the notices flood in, pension fund investors are pulling back from their hedge fund commitments. The US$11 billion School Employees Retirement System of Ohio has decided to shelve its hedge fund investments, which currently stand at US$258 million, according to Laurel Johnson, a spokesperson for the plan. Johnson said the plan, which is allowed to invest up to 10% of its assets in hedge fund strategies, is “moving very slowly toward reaching that ceiling” because of problems in the financial markets.
Another large pension plan, the Iowa Public Employees’ Retirement System, is also shelving its hedge fund commitments. The US$20 billion plan told FINalternatives that its staff and consultant are reviewing what impact the new investment landscape could have on the risk and returns of hedge funds and funds of funds. The plan, which recently tapped funds of hedge funds Blackstone Alternative Asset Management and JP Morgan Alternative Asset Management to manage a US$600 million mandate, said it has not invested any money in the funds to date, and given the current market conditions, it is “in no hurry to fund them at this time.”
Advisors Say ‘Stay the Course’
Although pension plans and other institutional investors are heading for the exits, consultants are pleading for their clients to not follow the herd. Eric Petroff, director of research for Wurts & Associates, said institutional investors who abandon their hedge fund plans are short-sighted.
“In our opinion, succumbing to panic simply does not fall under the definition of serving as fiduciaries,” wrote Petroff, in a missive to investors. “As mentioned in our previous client memorandum, we continue to believe disciplined rebalancing offers the highest probability of bolstering long-term expected returns.”
Going forward, Petroff said some hedge fund strategies such as arbitrage will likely experience a drag on returns because of their substantial use of leverage in costly credit markets, while more directionally-biased strategies should outperform because of their lack of leverage and more attractive equity market valuations.
Wurts & Associates recently convinced one of its pension plan clients, the US$2.7 billion Fresno County (California) Employees Retirement Association, to allocate 8.7% to hedge funds and boost its private equity commitment to 7.1% from 6%.
Brad Balter, founder of Boston-based hedge fund advisory Balter Capital Management, echoes Petroff’s sentiments. Balter urges ultra high-net worth, endowment and pension fund investors to not run for the hills.
“When we talk to our investors, they’re scared at the macro level, but at the end of the day you have to battle the natural instinct we all have of a flight or fight response,” says Balter.
“Fleeing out of panic is where you do the most damage. Instead, liquidate those funds you no longer believe will be able to stay in business and focus on those that have seen unusual drawdowns due to market dysfunction, but remain well positioned for the future.”
Balter says his investors are currently staying put and advises other funds of funds to talk frankly to their investors.
“All they want is to just hear what you’re thinking, and we’re blunt, so we’ll tell them exactly what’s not working,” he says.
Although the hedge fund industry has shifted to a buyer’s market at the moment, one emerging hedge fund manager remains optimistic on his fundraising prospects. Greg Spiegel, founder of New York-based Riptide Capital, admits it is a tough fundraising market for emerging managers, but says there’s no shortage of capital.
“Guys want to see how things shake out over the next few months, and a lot of funds of funds have probably gotten a lot of redemption notices,” says Spiegel. “In the current environment, some guys think it’s a great opportunity while others are scared to death but that’s what makes a market.”