Sutherland insights asset management news flash september 02, 2014

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ASSET MANAGEMENT NEWS FLASH September 02, 2014


Table of Contents Fund Flow ............................................................................................................................. 3 Technology .......................................................................................................................... 11 Strategy .............................................................................................................................. 13

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Fund Flow Passive funds an active threat for Europe’s fund managers August 31, 2014 | Reuters http://www.reuters.com/article/2014/08/31/us-investment-funds-passive-insightidUSKBN0GV0FN20140831 Warren Buffett built a fortune of nearly $60 billion from astute stock picking, but when the 83-year-old dies, the vast majority of the money he leaves his wife will be parked in a fund that simply moves in step with an index. The afterlife plans of the man nicknamed the Sage of Omaha, revealed in a letter to his investors earlier this year, underline a sea change afoot in the investment industry. Fed up with high fees and poor performance, investors are increasingly shunning active fund managers who promise to beat the stock market in favor of cheaper, passive funds, which simply track it. Such funds account for about a quarter of the money invested in the UK stock market, up from 15 percent a decade ago. The switch is accelerating, with index funds attracting inflows of $3 billion in the first half of this year, while active UK-focused funds saw $4 billion leave, a Reuters analysis of data from fund tracker Lipper showed. The passive wind blows even stronger in the United States due to years of underperformance by active funds, which has led to institutions parking half of their equity allocations in index trackers, according to data from State Street. And the shift is spreading to other parts of the world, putting at risk revenues earned by money managers, banks and brokerages that service funds and more than half a million jobs related to fund management in Europe alone. Industry experts expect Europe, where active mutual funds are still the dominant force, making up 80 percent of allocations, to move more in sync with the United States, following the lead of Britain, the region’s top capital market. “It’s only a surprise that investors have taken this long to realize that the puffery around long-term outperformance, star managers, etc., is just that ... puffery,” said Peter Douglas, founder of investment consultancy GFIA. NICE N’ EASY, TILL NOW Patchy economic recovery since the 2008 crisis and increased regulation, such as a proposed clampdown on a fund’s activities in times of a crisis to ensure stability, have hampered active managers’

3|Sutherland Insights Asset Management News Flash Sep 02, 2014


ability to outperform. Weak gains have already made it harder to justify fees that are sometimes 10 times or more than the cost of a passive fund, which in the case of the most liquid exchange-traded funds can be less than 0.1 percent on a headline level, before factoring in brokerage, transaction and tax costs. While some active funds have cut their charges or introduced cheaper products in response to the threat, the gap is still large. Leading index fund providers such as Vanguard, Deutsche Bank and BlackRock have cut fees this year to grab market share, putting further pressure on the active managers to do more. “You can’t charge what you could in the past,” said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers, which manages 582 billion euros ($764.39 billion). “In a way it’s a good thing. For many years the fund management industry had it easy ... Return on capital in fund management has been very nice.” Vanguard, whose S&P 500 index fund Buffett favored in his letter to investors, and BlackRock have taken in the bulk of new money to European fund houses since the summer of 2013. The biggest equity fund investing across Europe, Vanguard European Stock Index Fund, managed $22.4 billion at the end of July, more than twice the size of Fidelity Funds-European Growth, the biggest actively managed fund for the region. The growth in passive funds is reflected in the industry’s net revenues, which have remained flat globally for the last four years, according to the Boston Consulting Group, even as funds under management hit a record $69 trillion in 2013. ADDED VALUE? The biggest problem for active fund managers charging more for their services is consistently beating the market. A study of fund returns in local currency over the last 10 years using data from Lipper shows only 35 percent of the funds investing in Britain have outperformed the FTSE All Share Total Return index, which includes dividend payouts from constituents. That percentage declined to 29 percent in the first half of the year. Active funds investing across continental Europe, meanwhile, have performed even worse, with just a fifth of them gaining more than the MSCI Europe Total Return index since 2003. The star managers that do manage to beat the crowd often fail to maintain their outperformance.

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Of the 107 top quartile funds, or those ranking among the top 25 percent by gain from investing in British stocks in 2013, only 18 managed to repeat the feat through June-end this year. Two of them held that spot for the previous five years, and none managed to achieve the feat over the last 10 years. A similar pattern is found when looking at other regions around the world, Reuters data showed. For Buffett, this meant one thing for the average investor. “The goal of the non-professional should not be to pick winners – neither he nor his ‘helpers’ can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal,” he said in his letter to investors. The struggle to pick a winner consistently has led some leading institutional investors to change how they invest, with some of them putting the bulk of their funds, as much as 70 percent in some cases, in passive investments, said Laurence Wormald, head of research at Sungard APT. Money managers of all stripes are also developing new products to offer cost-conscious investors a middle ground between the pure passive and active. So-called “smart beta” funds track a bespoke index that has been tweaked to weight it in different ways, using factors such as stocks’ cheapness or price momentum. Net flows into U.S.-based smart beta equity funds stood at $234 billion in the first seven months of the year, already exceeding the total inflows of $208 billion recorded last year, according to data from BlackRock. In spite of the strong demand for low-cost passive funds, active fund managers will continue to play a key role in the global investment industry because the possibility of higher returns is always attractive, particularly in a low yield environment. In addition, there is only so far the market can go passive before the price of a stock - still the most popular asset class for passive investing - becomes detached from fundamentals, thereby allowing an active manager to profit more handsomely. The ability to profit in such as manner has been evidenced most recently by firms such as Glaucus Research and Gotham City Research, who have spotted corporate fraud through a deep investigation into company accounts, such as at Gowex. “Passive investing is obviously at the mercy of these frauds,” said Michele Gesualdi, chief investment officer of hedge fund investor Kairos. “If you are with a long-only active fund or a hedge fund, then certainly you have a chance to avoid these frauds or maybe finding them as shorts,” he added, referring to short-selling, the ability to sell a borrowed stock and profit when it falls.

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Still, some 3,200 money managers in Europe will need to broaden their expertise across asset classes and develop new products to reassure investors they are adding value. “That’s the acid test,” said Thomas Ross, head of European distribution at U.S. money manager William Blair, which manages $62 billion, largely for institutions. “Can you beat the benchmark after fees? If you can, you’ll fare well, and if not, the market will move against you and you’ll be indexed.”

Vanguard cuts charges on 25 funds as tracker price war hots up August 28, 2014 | Investment Week http://www.investmentweek.co.uk/investment-week/news/2362214/vanguard-cuts-charges-on-25funds-as-tracker-price-war-hots-up Vanguard is to cut charges on 25 UK and Irish-domiciled funds, including its LifeStrategy range, as it responds to recent price cuts from other providers in the tracker space. The changes, which will come into effect next Monday (1 September), will see Vanguard charge just 0.08% for its UK equity index trackers. Earlier this month Investment Week revealed providers were on the verge of responding to Fidelity’s recent price cuts, and today’s move puts Vanguard broadly in line with those charges: Fidelity’s UK index tracker costs 0.07% on its own platform and 0.09% from other providers. Vanguard’s global ex-UK tracker (at 0.15%) is now cheaper than Fidelity’s World tracker (0.18% via Fidelity or 0.2% on other platforms), but Fidelity remains cheaper for Japan (0.1% or 0.12% compared with 0.23% at Vanguard) and EM (0.23% or 0.25% compared with 0.27% at Vanguard) trackers. Other providers, such as BlackRock and L&G, fall in between the two on EM, Asian and Japan trackers. Ongoing charges across Vanguard’s index funds will now range from 0.08% to 0.38%. ETF ongoing charges will range from 0.07% to 0.29%, while ongoing charges for the LifeStrategy fund range will be lowered to 0.24%. Vanguard Europe managing director Tom Rampulla said: “As we broaden our presence in Europe, we will leverage operating efficiencies and use our increasing global scale to keep costs to a minimum for investors. “These fee reductions are business as usual for Vanguard.” Fidelity responded by saying it remained the lowest cost provider of trackers for regional equity markets.

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Ben Waterhouse, head of UK retail sales at Fidelity Worldwide Investment, said: “We launched our low cost index range in March and further cut our charges in May to offer investors an alternative to some of the poor value trackers available today. This was a popular move as since launch, our range of seven trackers has grown by over £400m. “Today, we remain the lowest cost provider of index trackers for regional equity markets. Investors and intermediaries can access Fidelity Index funds from as low as 0.07% OCF making them the best value equity tracker funds available in the market.” Mutual Fund

Former Ongoing Charge

New Ongoing Charge

FTSE UK Equity Index

0.15%

0.08%

FTSE UK Equity Income Index

0.25%

0.22%

FTSE UK All Share Index Unit Trust

0.15%

0.08%

FTSE Developed World ex-UK Equity Index

0.30%

0.15%

FTSE Developed Europe ex-UK Equity Index

0.25%

0.12%

US Equity

0.20%

0.10%

SRI Global Stock

0.40%

0.35%

Global Small-Cap Index

0.40%

0.38%

SRI European Stock

0.35%

0.30%

Emerging Markets Stock Index

0.40%

0.27%

Japan Stock Index

0.30%

0.23%

Pacific Ex-Japan Stock Index

0.30%

0.23%

Bond funds

0.20%

0.15%

Former Ongoing Charge

New Ongoing Charge

S&P 500 UCITS ETF

0.09%

0.07%

FTSE 100 UCITS ETF

0.10%

0.09%

FTSE Developed Europe UCITS ETF

0.15%

0.12%

FTSE Emerging Markets UCITS ETF

0.29%

0.25%

ETF Range

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Skandia to shut Invesco funds and switch £640m to Woodford August 22, 2014 | FundWeb http://www.fundweb.co.uk/news-and-analysis/advisers/skandia-to-shut-invesco-funds-and-switch640m-to-woodford/2013576.article Skandia is to close its versions of the Invesco Perpetual High Income and Invesco Perpetual Income funds it offers in its life and pensions business and transfer the £640m holdings into its version of Neil Woodford’s CF Woodford Equity Income fund. Skandia says the move has been made on the back of investor feedback and is in the best interests of clients. The transfer will complete on 9 October. The version of the Woodford fund will be the same as that held within Skandia’s WealthSelect proposition. Woodford left Invesco in April in a move which saw Mark Barnett take over management of the High Income and Income funds. A Skandia spokesman says: “The Skandia Invesco Perpetual income funds were previously managed by Neil Woodford. “Following the launch of the Woodford Investment Management Equity Income fund we have decided to transfer assets from the Skandia Invesco Perpetual funds into the OMW Old Mutual Woodford Investment Management fund so that customers continue to benefit from the proven investment expertise of Neil Woodford.” Skandia adds if investors wish to invest with Barnett they can access him through the Skandia Invesco Perpetual Strategic Income fund which remains open. Switches can be made into this fund before the transfer takes place. Skandia says there will be no specific charge for the transfer but trading costs will apply. It says this will typically be around 1 per cent. Hargreaves Lansdown senior analyst Laith Khalaf says: “Life companies do close funds from time to time because of lack of investor interest, but to switch from one manager to another in this way is a highly discretionary call.”

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Fidelity proposing International fund merger August 21, 2014 | FundWeb http://www.fundweb.co.uk/news-and-analysis/news/fidelity-proposing-international-fundmerger/2013541.article Fidelity Worldwide Investment is proposing to merge the £209m Fidelity International fund into the £9m Fidelity Open World fund. If approved, the transferral of the assets would take place in November. The manager of both funds, Ayesha Akbar, will remain in this role with Open World, with co-manager James Bateman staying on as well. Meanwhile Nick Peters, co-manager on the International fund, will not be involved with the Open World fund and will focus on the other funds he manages. Additionally, Fidelity says the investment process adopted will not change as a result. A Fidelity spokesman says: “As a fund investing in other funds, the Fidelity Open World fund provides a structure that we believe offers greater investment opportunities and prospects for positive investment outcomes, along with the additional benefit of input from third party investment managers. “The risk profile is not expected to change as a result of this merger, and it will continue to be managed by Ayesha Akbar with the same investment process and philosophy building on the wider Fidelity Solutions resources.”

Threadneedle to close Worldwide Select fund August 20, 2014 | Citywire Global http://citywire.co.uk/wealth-manager/news/threadneedle-to-close-worldwide-selectfund/a768138?ref=wealth_manager_all_stories_list Threadneedle is closing their Worldwide Select fund after it failed to grow in size. ‘Since its launch in December 2007, the fund has not grown to a level which makes it economically viable to manage and given its current size, the fund is unlikely to attract new investors,’ Threadneedle said in a letter to clients. The fund is managed by Giles Gilbertson and Damian Barry and is less than £3 million in size. It will close on September 12.

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“We are committed to providing our clients with the best investment opportunities and due diligence on their assets, and as such regularly review our fund range,’ the firm explained. ‘We have decided to close the Threadneedle Worldwide Select Fund due to its small size and limited demand for the strategy, and in the best interest of its shareholders.’

New York state pension fund estimate reaches $180.7B August 16, 2014 | The Record http://www.troyrecord.com/business/20140816/new-york-state-pension-fund-estimate-reaches1807b New York’s pension fund for state and local government workers reported Friday reaching a record high of $180.7 billion following a 3.6 percent return on investment in the most recent quarter. That includes “solid performance” in domestic and global stocks, which account for more than 55 percent of the portfolio, said state Comptroller Thomas DiNapoli, the fund’s trustee. Almost 27 percent is invested in cash, bonds and mortgages, almost 8 percent in private equity, 7 percent in real estate and the balance in other investments. “The markets have had a long-term positive run,” DiNapoli said. “We hope that will continue. Whether it’ll be as strong as it was last year, it’s too soon to tell.” For the fiscal year that ended March 31, the fund reported a 13 percent return on investment. While many have speculated the stock market has been running stronger and longer than anticipated, it’s hard to know whether that’s accurate or whether the market will have a correction rather than a bubble bursting, DiNapoli said. “Over the long term, the fact that the economy is improving is a good thing,” he said. The fund’s diversity makes it well-positioned to weather a possible correction in the stock markets, he added. The Common Retirement Fund for some 644,000 government employees also paid $2.2 billion of benefits to about 422,000 retirees and beneficiaries in the quarter that ended June 30. The average employer contribution rate is 20.1 percent of salary for most public workers and nearly 27.6 percent for police and firefighters, though rate reductions are expected to be announced later this month. “We’ll wait and see what the final numbers are, but I think we’ll have good news for the local governments,” DiNapoli said. While acknowledging some recent shifts among fund participants, with a few thousand fewer workers and more retirees, DiNapoli said there are still far more active employees, and as the economy improves he expects governments will start to rehire people.

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Technology The cost of regulation in asset management industry August 25, 2014 | South China Morning Post http://www.scmp.com/business/money/markets-investing/article/1580407/cost-regulation-assetmanagement-industry A beleaguered asset manager told me his son showed an interest in becoming a fund manager. But the father advised him to get a law degree and work in an asset manager’s compliance or legal department instead. “Because nowadays lawyers and compliance officers are guaranteed longer careers than investment managers at every financial institution.” Today, investment bankers are shocked to have compliance officers participate in business development meetings and mortified to hear them give opinions about how bankers should market to clients. Then, they must suffer the indignity of asking compliance departments to approve the background of each new client before they can meet them for the first time. These anecdotes are more than withering bureaucratic fire resulting from the financial crisis. The risk of compliance people running financial institutions lies in their overwhelming propensity to say “no” to any new idea, product or client because that is the safest decision of least resistance. The unavoidable results are increased costs and delays for many legitimate businesses and individuals without improving protection for banks or clients. Before the financial crisis, bankers used to say a talented trader or asset manager did not need risk control because they inherently possessed risk control as part of their thought process. Today, entire areas of perceived systemic risk such as proprietary trading have been shut down and made extinct due to the Volcker Rule. An army of compliance officers, who think eliminating risk is the same as risk control, now virtually run banks and asset management firms. While banks are being rendered into indistinguishable service companies that buy and sell a commodity - money - the asset management industry will probably suffer the most from this new era of financial service prohibition because it makes the most difference in clients’ investment outcomes. History shows that periods of high uncertainty and risk offer opportunities for big returns. But can asset managers exploit and convert these circumstances into returns for their end clients? Financial regulations and rigid organisational culture have turned asset management into a massmarket, undifferentiated industry on a global scale. Its managers have been industrialised and commoditised to a degree where it has lost its craft roots. Its current practices and methodologies work against capitalising on market dislocations and volatile prices.

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Worst of all, new complicated rules for making investments create a dilemma where advisers are no longer close enough to clients to inspire the necessary trust and motivation to make returns beat the markets. The industry has devolved from an imaginative art into bland science, from independent craft to economic scale, from trusting judgment calls to being dependent on complex models that are far removed from business reality. For clients, the true outcomes are more risks, more complexity and higher fees. Ill-conceived regulations threaten to dilute its individualistic, craft heritage and the skills needed to perceive unique investment opportunities. Today, these traits have become scarce. The big picture understanding of investing has become extinct especially when specialist mandates replaced balanced ones. There is an industrywide shortage of managers with bold insights into holistic drivers of risk and market shifts in volatile periods. Where will the next generation of super investors like Warren Buffett come from? Ironically, sweeping regulation has forced the industry to merely provide products, not solutions. Since it is burdensome for relationship managers to spend the time to comprehend clients’ goals, they are forced to exaggerate the virtues of their products. This rapidly entrenches a blame culture in which mitigating career and reputation risk take precedence over investment risk. Like their clients, advisers and managers seek protection within a comfortable pack, like a bunch of highschool girls, with no creative outliers in today’s investment environment. They follow the herd to manage peer risk. More often than not, they rely on client inertia and market momentum to save them from bad investment choices. Asset managers need to protect a special mindset that is quick to detect opportunities and mobilise all corporate resources in their pursuit. Assuming that market volatility and uncertain regulatory policies will persist indefinitely, the asset management industry needs to recreate itself. Otherwise, it faces the same prospects as European economies - another “lost decade”.

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Strategy Elcot acquires 25% stake in Premier Asset Management August 27, 2014 | Citywire Wealth http://citywire.co.uk/new-model-adviser/news/elcot-acquires-25-stake-in-premier-assetmanagement/a768940 Elcot Capital Management has acquired a 25.1% stake in Premier Asset Management from Electra Private Equity. The £10 million investment, which is subject to regulatory approval, includes a limited time option to purchase another 25.1% for £10 million. Electra will maintain a 48.9% holding in Premier. Senior management and fund management teams at Premier will also own 25% of the company. Premier currently has over £3 billion of assets under management. Mike Vogal, chairman and chief executive of Elcot and chairman of Premier, said: ‘Premier has a really strong investment team which is generating some outstanding investment performance. As a result it’s growing fast.’

Barnett Waddingham acquires Sipp provider August 26, 2014 | Money Market http://www.moneymarketing.co.uk/news-and-analysis/pensions/barnett-waddingham-acquiressipp-provider/2013603.article Barnett Waddingham has acquired Wirral-based Sipp and SSAS provider Harsant Pensions for an undisclosed sum. The deal means Barnett Waddingham takes on 400 Sipp clients, taking its portfolio to over 2,725 schemes and more than £1bn in assets under administration . Its SSAS book is to grow by 70, to more than 2,100 schemes and £3.6bn in AUA. As part of the deal, Barnett Waddingham also takes on the adminstration of some of Harsant’s defined benefit and defined contribution pension schemes. Barnett Waddingham Sipp chief executive Julia Basset says: “The acquisition of Harsant Pensions is very much a part of our gradual and considered growth strategy. Harsant Pensions and Barnett Waddingham have previously worked together and so this deal is very much a natural fit for us and our long-term business goals.”

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Vestey Group enters into pension buyout with Rothesay Life August 21, 2014 | PIOnline http://www.pionline.com/article/20140821/ONLINE/140829979/vestey-group-enters-into-pensionbuyout-with-rothesay-life Vestey Group has conducted a £280 million ($464.4 million) bulk annuity deal with Rothesay Life for its pension fund, Western United Group Pension Scheme, London, said Ben Fowler, group head of reward and HR development for the firm. The deal completes a £500 million buyout of the pension fund. Mr. Fowler said this latest transaction follows two buy-ins totaling about £220 million with Rothesay in November 2012 and March 2014. This last deal is a buyout for the remaining liabilities. The fund will be wound up after the buyout is completed. The most recent agreement was facilitated by F&C Asset Management, said Mr. Fowler. F&C helped pension fund executives with a growth strategy through equity-linked bond funds; a derisking strategy with liability-driven investment funds; and with the transition to Rothesay Life. Simon Bentley, director of client relations at F&C, said in a telephone interview that the buyout was unique from the LDI point of view, because assets were invested in a pooled fund. In the past, a pension fund’s pooled LDI assets would have to be sold out to cash, then passed to the insurer. This was expensive and incurred market risk due to a time gap. “We have set up an interim step — (we took) the pro-rata slice of the original fund, moved those positions into our transition fund (the LDI Transition Fund), and reorganized those positions to look like what the insurer would like to take” Mr. Bentley said. Mr. Bentley said the transition fund was originally set up to accommodate new investors in LDI pooled funds. He said it was used as an interim step to convert positions to those suitable for the pooled funds. “It is definitely unique for facilitating the disinvestment of a client to move to buyout,” Mr. Bentley said. He said the manager believes it saved the client “in excess of £850,000” by facilitating the transaction in this way.

Wells Fargo funds business looks to double assets under management August 19, 2014 | Investment News http://www.investmentnews.com/article/20140819/FREE/140819910/wells-fargo-funds-businesslooks-to-double-assets-under-management Bank-owned money manager may look to acquisitions to drive growth

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Wells Fargo & Co. is planning an aggressive buildup of its asset management arm, executives said Tuesday The bank-owned money manager is looking to reach $1 trillion in assets, about double its current level, according to spokeswoman Laura Fay. The firm is hoping to reach the goal over the long term and resists putting a specific date on that milestone, Ms. Fay said. “We’re looking at acquisitions if it fits with gaps in our current product line,” she said. “We absolutely have aspirational goals in terms of the growth of the business not just focused on scale but also the quality of the assets.” The firm’s asset management division managed $489.7 billion in the quarter ended June 30, while its Advantage mutual funds hold $235 billion, according to the firm’s most recent earnings report.

Hedge fund investing strong in 2014 August 18, 2014 | PIOnline http://www.pionline.com/article/20140818/PRINT/308189978/hedge-fund-investing-strong-in-2014 Headline-making cutbacks raising questions, but most investors stay the course As institutional investment in hedge funds matures, most investors have been busy starting, growing, optimizing and fine-tuning their hedge fund portfolios. A few institutions, however, have drastically cut or completely axed their investment in hedge funds. Among the small cadre of investors that have decreased or dropped hedge fund investments are the $298.4 billion California Public Employees’ Retirement System, Sacramento; the $18.3 billion Los Angeles Fire & Police Pension System; the $11.3 billion New Mexico Educational Retirement Board, Santa Fe; £1.6 billion ($2.7 billion) Oxfordshire County Council, Oxford, England; and the $1.3 billion Louisiana Firefighters’ Retirement System, Baton Rouge. While some of 2014’s most attention-grabbing headlines, including Pensions & Investments’ May 12 “CalPERS chopping hedge fund allocation” headline, have focused on the asset owners cutting back on hedge funds, industry sources said they aren’t seeing a widespread move away from the asset class. “We are not seeing a trend in that direction,” said Brian Kmetz, assistant vice president, hedge fund research, for investment consultant Callan Associates Inc., San Francisco. In fact, most institutional investors, including public pension funds, endowments, foundations, insurers and sovereign wealth funds, have maintained or steadily increased their investments in hedge funds and hedge fund strategies. Hedge fund search and hire activity, particularly by first-time hedge fund investors, has been strong so far this year, a review of Pensions & Investments’ reporting showed.

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Among recent first-time hedge fund investors and searchers: •

Illinois State Universities Retirement System, Champaign, will soon begin a search for either hedge fund or fund-of-funds managers for a new 5% allocation for the $16.9 billion defined benefit plan it oversees;

The $5.1 billion City of Milwaukee Employes’ Retirement System hired Allianz Global Investors to manage $62.5 million in an absolute-return strategy in July; and

The $1.1 billion St. Paul (Minn.) Teachers’ Retirement Fund Association hired EnTrust Capital Management LP to manage $55 million in a customized hedge fund-of-funds separate account in May.

Other institutional investors have spent the first part of 2014 pushing their portfolios farther down the hedge fund evolutionary path by adding diversifying niche strategies. The $14.6 billion Illinois State Board of Investment, Chicago, seeks to diversify its $1.5 billion hedge funds-of-funds portfolio by moving as much as $150 million into a customized emerging hedge fund manager portfolio from existing hedge funds-of-funds managers. Even as the majority of institutional asset owners stay on course with their hedge fund portfolio development, the fact that one of the longest-tenured and largest of institutional hedge fund investors — CalPERS — has been stealthily halving its $5 billion portfolio throughout 2014 (P&I, May 12) has made some institutional chief investment officers edgy, sources said. A hedge fund consultant, who asked not to be identified, said CalPERS’ decision to slash its hedge fund allocation “clearly is (raising) questions” among the consultant’s large European pension fund clients. CalPERS’ investment executives have been focused on reducing hedge fund fees since at least 2009, when staff stated their intention to renegotiate the fees and terms of the contracts of hedge fund and hedge funds-of-funds managers in the portfolio, (P&I, April 20, 2009). “Fees are always on the table,” said Mr. Kmetz, noting Callan has had success in bargaining down hedge fund fees for clients. Mr. Kmetz maintained that hedge funds have been “performing up to our expectations” since the 2008 financial crisis, despite the “trumpeting of all the supposed virtues” of high hedge fund performance. “Obviously, people have expected a lot more” from hedge funds in terms of returns, Mr. Kmetz said, but added that “with hedge funds, you have to manage expectations and focus on the diversification and hedging protection they offer portfolios.” That said, a select few institutions have recently ended their experiment in hedge fund investing. Dropping hedge funds Among the funds that completely eliminated hedge funds is the Los Angeles Fire & Police Pension System. The $18.3 billion fund began redeeming its $549 million portfolio in May 2013, because the overall portfolio needed to be more diversified and hedge fund fees were just too high, Emanuel Pleitez,

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a trustee of the Los Angeles Fire & Police fund, said in a video interview with P&I in June. “If you look at hedge fund fees on a risk-adjusted basis ... (remaining in hedge funds) wasn’t justified. We need to show that we are willing to walk away from managers that are charging us exorbitant fees,” Mr. Pleitez said. LAFPP investment officials project a $13 million savings in management fees from the elimination of hedge funds, although $6.5 million of those fees will be reallocated to other asset classes, according to documents from the board’s March 20 meeting. After losing a $45 million investment in the Fletcher Income Arbitrage Leveraged Fund when its manager, Fletcher Asset Management, declared bankruptcy in 2012, the Louisiana Firefighters’ hedge fund allocation was down to 0.6% of plan assets, or just $8 million. The original hedge fund allocation of 5% was removed from the plan’s overall asset allocation in March. An asset allocation review in March eliminated the 3% hedge fund allocation of the Oxfordshire County Council Pension Fund. UBS Global Asset Management is the sole manager of the pension fund’s £35 million hedge fund portfolio. According to a report from the fund’s June 6 board meeting, the proceeds of the elimination of the 3% hedge fund allocation and a four percentage point decrease in the equity target to 59% of plan assets will be reallocated to infrastructure and growth funds. A new asset allocation approved in June for the New Mexico Educational Retirement Board eliminated a 3% target allocation to hedge funds, but didn’t eliminate hedge funds, said Bob Jacksha, chief investment officer, in an interview. Instead, NMERB joined CalPERS and other large investors regrouping hedge funds with other like investments, whether they are in traditional asset class buckets or broader groupings such as opportunistic or diversifying assets. “We do use hedge funds in other areas,” Mr. Jacksha said, noting Bridgewater Associates LP’s Pure Alpha Fund resides in the system’s global tactical asset allocation slot and credit hedge funds remain in the opportunistic category

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