Moves, money, and the SEC

Timothy Stark: from Oceans to Orphans

Re-thinking risk at Denmark’s ATP

Succession planning for beginners


Welcome, dear readers, to the Year of the Rabbit, which begins February 3.  We hope the expiring Year of the Tiger brought you good fortune, and that the YOR will be even better.

Carlos Tejada reporting from Hong Kong for The Wall Street Journal notes that the rabbit is: “energetic, active, alert and tame, though at times cowardly.”

The Rabbit, in fact, sounds remarkably like most people we know.  The Rabbit is…us.

We begin the YOR with a slew of comings and goings, leading with one that is especially auspicious:


Comings and Goings:

Timothy Stark: From Oceans to Orphans

From an unimpeachable third party, here’s some fascinating news reported by Mark Faro for Foundation and Endowment Money Management on January 19:

Casey Family Programs Reels In Alts Staffer

Seattle-based Casey Family Programs has hired Timothy Stark, investment officer and manager of treasury operations for Woods Hole Oceanographic Institute, as director of private investments for its roughly $2 billion portfolio. He will join the staff of CIO Joseph Boateng on March 1 and will be based in the foundation’s New York office.

[Casey Family Programs is the nation’s largest operating foundation focused entirely on foster care and improving the child welfare system.]

Mr. Stark was selected for his experience with private investments, including private equity, real estate and infrastructure, said Charles Skorina, an executive search consultant with San Francisco-based Charles A. Skorina & Co., who handled the search. Casey was also attracted to his experience with public equity and fixed income. “He is able to help the investment staff across the board when needed as well as focus on the private market area,” Skorina explained.

Woods Hole has a $350 million endowment and a $165 million pension. Although Mr. Stark is the only investment staffer, the nonprofit uses Cambridge Associates as its consultant. The fund is in the process of reviewing its options and should formulate a plan this quarter, said Chris Winslow, VP for finance and administration/CFO at Woods Hole.


Timothy Jarry: A succession plan succeeds:

We’ve commented before on the relative rarity of good succession planning and executive development among nonprofit institutional investors, so we’re always glad to see a counter-example.

Timothy Jarry, a class-of-2000 alumnus of College of the Holy Cross, worked in their investment office for seven years: two as an analyst, two as an investment officer, then three years as associate chief investment officer.  Now, as of January, he takes over as CIO of the $570 million endowment.  He succeeds William Durgin, who retired after 26 years at the Worcester, Massachusetts school.

After graduating from CHC, Mr. Jarry earned an MS in accounting and an MBA from Northeastern University, and a CPA credential.

A succession as smooth as this one isn’t always attainable, but it’s a win for everybody when it happens.  Kudos to Mr. Durgin and to Michael Lockhead, VP of Administration and Finance, for showing how it’s done.


Amy Falls: From Andover to Rockefeller

Phillips Academy in Massachusetts (commonly known as Phillips Andover, or just Andover) is one of the oldest and most elite American prep schools.  And, with $780 million to invest, it’s one of the very few secondary schools with a big enough endowment to justify a professional chief investment officer.

Amy C. Falls held that position until she was recently recruited by Rockefeller University in New York.  Ms. Falls, an Andover grad, produced a 14.5% return at Andover in FY 2010.  She will now take over Rockefeller’s $1.8 billion endowment in April.

Ms. Falls earned a BA at Georgetown University and an MPP at Harvard’s Kennedy School.  Before her stint at Andover, she was global fixed income strategist at Morgan Stanley.

A statement by the university said tersely that current CIO Lisa Danzig was “stepping down.”

Although Rockefeller’s loss of 18.2% under Ms. Danzig in FY 2009 was actually slightly better than the national average loss of 18.7%, they still hit a severe budget crunch.  Rockefeller’s spending rate was 6% of the endowment, well over the 4.9% average for its peers. And it depended on the endowment for fully one-third of its operating budget.

The endowment had previously returned an average of 11.2% for the 15 years through FY 2009.

I’ve had the pleasure of meeting Ms. Danzig, who spent ten years at Rockefeller, first as director of investments for private equity, then as CIO from 2005.  She struck me as a highly competent and hardworking professional.  I wish her all the best in her future endeavors.


Sid Browne: Shulem nakah to Yeshiva U.

Dr. Sid Browne, Yeshiva University’s first and only chief investment officer, resigned in late December, although it’s not clear where he’s going, or who will succeed him.  The university is not responding to inquiries.

Before 2009, the New York seminary didn’t bother with a professional investment office, leaving direction of its $1 billion endowment in the safe hands of its board and investment committee.

Yeshiva’s board, after all, included financial mavens like Bernard Madoff, who received an honorary degree from the grateful school in 2001.  He was also appointed treasurer of the university and chair of its business school.  In the same year, Mr. Madoff helped a friend of his onto the board, another notable investment expert named J. Ezra Merkin, who became chair of the investment committee.  What could go wrong?

The board was so impressed with Mr. Merkin that it invested heavily in his Ascot Partners fund.  Mr. Merkin, as the world now knows, funneled it all out the back door to Mr. Madoff, which is the last anyone saw of it.  $110 million, about 10% of the endowment, was lost to the peculations of Madoff and Merkin.

In August, 2009, Yeshiva created a CIO position and filled it with Sid Browne.  Dr. Browne, a professor at Columbia University’s business school, had held top leadership positions at Goldman Sachs and Breven Howard.  He was charged, however belatedly, with setting up and staffing an internal investment office.

Pensions & Investments reports that Dr. Browne will take another job in investment management, not otherwise specified.

It may seem harsh to ridicule Yeshiva, given that so many clever and accomplished people were denuded by Madoff, but it isn’t.  They were stewards for other people’s money, and they failed utterly in their duty.  Lest we forget.



Re-thinking risk at Denmark’s ATP

A few weeks ago I noticed that Bjarne Graven Larsen, chief investment officer of Denmark’s $73 billion ATP public pension fund was leaving after 12 years on the job.  He was hired as co-CEO of the Danish investment bank FIH Erhvervsbank.

This sounds like a step up for Mr. Larsen, and it’s probably a more lucrative post, but he will still have the same ultimate boss, since ATP is a part owner of the bank, which it acquired as part of its private equity portfolio.

Not exactly a pulse-pounding development.  But then I dimly remembered that Peter L. Bernstein had made some reference to ATP in the last chapter of his last book.

I have often relied on Mr. Bernstein to explain the inexplicable in his popular writings on risk and investment theory.  Alas, he died in the summer of 2009 at age 90. Capital Ideas Evolving, a follow-up to his seminal Capital Ideas, was published in 2007.

When he listed investors who were doing something new by way of practical application of risk-management, he wrote: “Intense competition combined with increased sophistication is leading to radical innovations in portfolio strategies, risk management, and the costs of transacting…These developments are by no means limited to institutional investors in the United States.”  He went on to mention ATP as an example of funds which had completely revised their internal investment process toward an emphasis on alpha and beta and to improve risk management and diversification.

We don’t usually think of Denmark as a laboratory for “radical innovations” in portfolio strategy, or anything else.  Since the Vikings decided to park their boats to stay at home and make cheese, they’ve been a pretty quiet lot.

But I took a look at what Mr. Larsen and his colleagues had been up to, and it’s actually pretty impressive.

You could say that it was radicalism born of conservatism.

After the financial gyrations of 2000-2001, Denmark required their pensions to mark their liabilities to market, ensure solvency, and tighten up risk management.

ATP’s liabilities consist of annuities with a guaranteed minimum rate of interest. In the cold light of mark-to-market liabilities, they saw that falling interest rates could leave the fund insolvent as the discounted value of those future liabilities ballooned. In fact, they found a 30% chance, on a five-year horizon, that ATP would lose their entire reserves.

Now, when you look at the governance of ATP, it’s hard to imagine that they could come up with a creative response to this situation.  We note that they have a board of representatives (31 members), a supervisory board of directors (13 members), an executive committee (3 members), and a chief executive officer.  But somehow things got done.

First, they set up a separate hedging portfolio, buying swaps to completely insure their liabilities against interest-rate risk.

The investment portfolio, separate from the hedging portfolio, uses its own dynamic risk budget.  It’s divided into five segments based on risk characteristics rather than traditional distinctions between equity, bonds, etc.  A tight feedback loop ensures that rebalancing happens quickly when the red lights start flashing on the dashboard of the risk management group.

But wait, there’s more.  Recognizing that investment returns can, and should, be analyzed into alpha and beta components, ATP uses two separate, independent, investment teams.  One focuses on maintaining “index” returns which track the general market.  The other, the “alpha” team focuses on finding short-term, excess returns on a reasonable risk-return basis.

Okay, I can feel eyes glazing out there.

But, consider this: In 2008, when CalPERS, ably assisted by Wall Street’s best and brightest, lost 25% of its value in 2009, ATP lost only 3.2%.

Over 2007-2009, ATP, with its aggressive diversification, dynamic risk-budgeting, and hedged tail-risk, averaged a return of 5.7%.

And they maintained their solvency.  “Solvency” in Danish means being 100% funded by their rigorous standards.  At the end of 2008, ATP was 113% funded.  In 2009, that rose to 118%.  Compare that to the 80% funding at many of our public pensions, using our own, not-so-rigorous standards.

You can read the long version in this paper co-authored by ATP CEO Lars Rohde in the Rotman International Journal of Pension Management.

Finally, we note that the risk-management regime at ATP is even robust enough to resist the political winds from Brussels.

Europe’s “rescue fund” (the European Financial Stability Facility) is currently peddling 5-year notes to prop up Greece, Ireland, Portugal, et al.  They’re rated triple-A, and some investors are snapping them up (38% are going to Asians).

But ATP isn’t buying.  Mr. Larsen’s successor as CIO, Henrik Gade Jepsen, said in Copenhagen last week: “We really want the safest bonds in our portfolio.  It’s very important for us that our government bonds are really safe.”

Mr. Larsen seems to have left his shop in good hands.



Succession planning for beginners:


Power is my mistress. I have worked too hard at her conquest to allow anyone to take her away from me. — Napoleon Bonaparte

Succession planning is a challenge for all organizations and, as we have noted, it’s especially problematic for hedge funds, which often tend to be the shadow of one or a few founding leaders.  Historically, this is understandable, but history, their customers, and the regulators aren’t going to cut them slack forever.

In October, 2009 the SEC issued a bulletin which effectively removed the “ordinary business defense” exclusion which companies previously used when they didn’t want to disclose details of their succession process to shareholders.

As The Conference Board noted, the SEC was acknowledging that poor CEO succession planning constitutes a significant business risk for investors.


As hedge fund clients have shifted from high net worth individuals and funds of funds to pensions, endowments and foundations, the need for hedges to adopt institutional-grade infrastructure and management processes has become obvious.

Failure to get ahead of this problem will leave hedges at a competitive disadvantage.  Not to mention that regulation could be just around the corner.

As part of the financial reform bill passed last year, private equity and hedge funds with assets over $150 million will have to register as investment advisors with the SEC, if they are not already so registered (and, to avoid the legal and other expenses, many smaller firms never bothered).

Registering as an investment advisor doesn’t make a fund a public company subject to general rules like the bulletin mentioned above; a hedge investor or limited partner is not a shareholder.  But anyone can see where this is going.

Some of the most desirable, deep-pocket hedge clients are public pensions like CalPERS.  And, they, coincidentally, are also the most ardent “activist” investors, always eager to tinker with the governance of “their” companies.

Just last week, the Central Laborers Pension Fund of Jacksonville, Illinois announced that it would press Apple for more information about Steve Jobs’ medical status and succession planning than the company wanted to divulge.  They’re not the only Apple investors who are curious.

Smart hedge fund founders are not waiting for institutional agitation.  Six months ago, Steve Cohen, the founder of SAC Capital Advisors and one of the most successful and reticent of the hedge fund doyens, altered his management structure, promoted four senior executives to management roles, giving him more time for, among other things, employee development.

On the other side of the market, we were interested to hear what Ash Williams, executive director and CIO of the $150 billion FSBA Florida pension fund had to say on the subject.

Barry Burr of Pensions & Investments, asked him what he thought was the biggest risk to FSBA.  Mr. Williams said:

Human capital risk and succession risk.  The board has been fortunate to have a very gifted investment staff and a very gifted staff generally for a number of years with a very low turnover.  That’s good because it gives you a very stable culture.  The flip side is it’s easy for compensation to stagnate because there is not a need to get back into the market to replace talent at current valuations.  So it’s easy to get way out of step with the marketplace, which puts you at risk of losing talent.

And you don’t have to have a big staff or big budget to develop talent.  As I pointed out in my last newsletter, Myra Drucker had a total staff of seven at the Xerox pension plan, yet trained most to become CIOs in future jobs.

See: The Skorina Letter 12/15/20, Myra Drucker’s amazing CIO academy,

Another hedge fund manager we have profiled, Elena Ambrosiadou, the ex-BP chemical engineer and CEO of the $1.2 billion dollar Ikos FX Fund, has often stated that the management process and structure of the firm are among its most important assets.

Apparently the systems and procedures at Ikos work as advertised.  In spite of her recent messy divorce from her husband and departed co-founder, operations at Ikos were unperturbed.  They returned 30.5 percent in the first 10 months of 2010, according to Bloomberg Markets 100 Richest Hedge Funds, reporting this month.  That made them fourth on Bloomberg’s list of best performers.

But as Irwin Speizer, writing for AR magazine, notes, other hedge fund founders have not had much luck creating permanence without the founder.  Stanley Druckenmiller closed his firm, $12 billion Duquesne Capital Management, in August and returned money to investors after a successful twenty-eight year run.  Without Stan, there was no fund.

George Soros has tried several times to step back from active management of his firm, only to return as performance dropped and talent departed.

[See: Aging hedge funds grapple with succession planning, 9 December, 2010, by Irwin Speizer]

Ultimately, I think, hedge funds will begin to adopt more corporate-style governance and succession planning because it’s just good business.  When institutions and their advisers vet outside managers, issues like this are on the checklist.  Having credible succession plans and depth of management will sometimes decide who gets the mandate and who doesn’t.


Parting shot:

Blackstone declares “peace in our time” with NYC pensions:

When statesmen are staring each other down, sometimes appeasement looks like a viable strategy.  Sometimes it works; sometimes it doesn’t.

Blackstone Group seems to be channeling the late, great Neville Chamberlain as they try to satisfy the wounded egos of some New York City unions.

Byron Wien, one of Wall Street’s distinguished elder statesmen, puts out a widely-read market commentary under the Blackstone Group letterhead.

Last January, regarding the widely-discussed problems with public pensions, he opined that the U.S. “literally can’t afford the benefits we have given our retirees in state and local government and we have to change that.”

This observation is not only true, but commonplace, but it was not, perhaps, prudent.  According to Bloomberg, Mr. Wien’s remarks may have so infuriated the New York City pension system that they may no longer invest with Blackstone.

In May, Blackstone prez Tony James tried to unruffled the pensions, with a letter saying that public pension benefits “should not be singled out and made vulnerable.”

In June, they tried again, with a letter pointing out that public pensions were Blackstone’s biggest clients, and that state and local governments should “keep their promises” to retirees.

But on January 7, NYC pension reps failed to show for a scheduled meeting with Mr. James, reportedly demanding a repudiation of the Wien comments.

Blackstone is still theoretically in the running for a new private-equity fund-of-funds mandate from the City pensions.  But it may take some world-class groveling to close that deal.

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