In this issue:

  • Dartmouth pulls the plug
  • Pension funds search and shuffle
  • More funds for hedge funds


Dartmouth announced the other day that their search for a chief investment officer to replace outgoing CIO David Russ has been suspended. Since this is such an extraordinarily good time to find investment talent, the problem can’t be lack of candidates.

Dartmouth spokesman Steve Kadish has announced that they will try letting the board investment committee directly oversee the investment office for at least a year. He said it would be “a healthy moment of learning.” The investment committee chair is hedge fund star Stephen Mandel, Jr (Dartmouth ’78), founder of Lone Pine Capital, whom Kadish described as “one of the best investors in the U.S.”

My opinion wasn’t solicited, and Stephen Mandel’s record speaks for itself. I will just observe that, in general, an endowment CIO and a hedge fund manager are two different things. Endowments play defense with a long horizon, transparent commitments, and a gaggle of constituents; hedges play offense quarter-by-quarter, with less consultation and more combat. Some good people can adapt to either management style; some can’t. We’ll see if everyone is still happy a year from


Endowments back from the abyss:

NACUBO and Commonfund aren’t ready to unveil their complete annual endowment survey yet, but they gave us a little something to put under the tree this week, with only two-thirds of the eventual responses in hand. On average, the endowments reported a 19% decline for the entire 2009 fiscal year. Better than the sickening 22% drop they previously found in a special survey covering just the first quarter. This implies what we expected to see: a terrible year that got a little less terrible as it unwound. Even without the detail, it also suggests that the huge and widely-reported losses at the Big Ivies have been partly offset by less-painful drops at the smaller schools. See press release here:

Pertinent to our corner here, John Nelson, a Moody’s analyst quoted by the Inside Higher Ed website, opined that the reported average allocation to alternative assets — 51% — seemed perplexingly high in the preliminary report. He has predicted that endowments would cut back on these “riskier” assets in pursuit of more liquidity. We’ll take another look when all the returns are in.


Pension funds search and shuffle:

Santa Barbara County’s retirement system ($1.6 billion) is looking for their first CIO, while the $5.2 billion Sacramento County system is looking to refill their CIO slot.

The $5.7 billion Oklahoma system just brought in Bradley Tillberg as their new CIO. He’s a CFA and University of Nebraska grad with years of experience as a private-sector analyst and portfolio manager. He’ll be just the second CIO at OPERS in their 46-year history.

Lawrence Johansen, an actuary and SUNY grad who held several positions in New York State’s teacher retirement system, is moving over to New Hampshire as director of investments at the $5 billion state retirement system.

And, in Fairfax County, Virginia; the Educational Employees Supplementary Retirement System ($1.6 billion) has bumped deputy executive director Jeanne M. Carr up to executive director and CIO. Ms. Carr, a CFA and another University of Nebraska (MBA) alum, succeeds her boss, Dr. Alan Belstock.

Thoughts from clients, colleagues, and passing strangers

More funds for hedge funds:

Just seven months ago the out-flowing tide of hedge fund money finally reversed itself.

All through 2007 and the first half of 2008, investors happily threw money into hedges with both hands, at the rate of ten or twenty billion per month. Then, when the economy ran aground last fall, they sucked it right back out. From October to March, forty billion per month was leaving, as fast as the lockups permitted.

That, and plummeting asset prices, decimated the industry. Bye-bye, Satellite. Sorry to see you go, Raptor. Catch you later, Carlyle Capital and Atticus.

Finally, in the merry month of May, the tide began to trickle back in, and by November was bringing in more than $25 billion per month.

On top of that, fund valuations have been trending upward with the recovering equity markets, enough to restore performance fees for many managers, who are no longer “working for free” (a hedgie trying to live on a mere two-percent is a pitiful thing to behold). As of November month-end, hedge assets were back up to $2 trillion, matching their 2008 peak, according to’s estimates released just this week.

So is everybody happy in hedge fund land? No, not really.

Them what has, gets. The two hundred or so multi-billion-dollar funds are mostly sitting up and taking nourishment. The many hundreds of smaller funds are still scrambling.

As the head of a big California pension plan said to me last week: “The most pressing question on my mind these days is always just how am I going to make over 8% with acceptable risk in the years ahead?” Some of those start-ups will have answers, if they can get themselves noticed.

The industry continues to consolidate, with the 1500 to 2000 smaller hedge funds fighting for barely a third of the hedge assets. They average not much more than $300 million, with many much smaller. It’s a textbook long-tail distribution, and that tail isn’t going to get any shorter.

I recently spoke to Bruce Zimmerman, the chief investment officer of UTIMCO at the University of Texas, who pointed me to an item in his 2008 year-end report:

“Our staff held over 1,200 meetings with prospective investment managers in addition to receipt and review of countless other investment proposals. This ‘pipeline’ of potential investments, resulted in approximately 60 new investments, roughly one-third of which were with private investment managers with whom UTIMCO already had an existing relationship.”

So, here is one of the biggest endowments in the country ($18 billion) screening thousands of proposals, meeting 5 or 6 of them every working day, and they hire just 40 new managers! Then subtract the private equity guys, the VCs, the hard assets, and how many went to hedges? A dozen? Maybe twenty?

How does a hedge manager get noticed in a mob scene like that?

I called Michael Litt this week. He’s a University of Chicago MBA, former partner at FrontPoint Partners, and the founder of a brand-new global opportunistic fund called ArrowHawk Capital, with over $500 million in commitments. I believe that makes him the biggest hedge fund launch of the year.

Michael happened to be on a Swiss train bound for meetings in Geneva when he took my call, and he reflected on his launch efforts as the Alps flashed by.

He said he knew that even his successful track record at FrontPoint (which he eventually sold to Morgan Stanley) wouldn’t get him more than a few extra minutes to pitch to pensions and endowment heads. So he spent a year just patiently going around and asking them what they wanted and needed.

Here’s what he heard: Institutional investors want real businessmen with real management experience, a strategy that makes sense, an infrastructure that will accommodate growth, transparency, a cap on fund expenses, a hurdle rate, no gate in the legal documents, no short money co-mingled with long money (they did not want fund of funds pulling out money on a whim and ruining strategies or positions), rock-solid risk systems and controls. Oh, and better pricing. Much better pricing.

So that’s what he gave them. Along with a global, multi-strategy offering run with a deep- talented bench. And did I mention that he is constantly on the road (or the rails) talking to investors and prospects? You can call it marketing or just good communications, but he is at it every day, relentlessly.

There really is hope for start-ups and smaller funds. Family offices can make quick decisions if you fit their needs. Seeder funds such as Protégé Partners, FRM, and SkyBridge still have money. And emerging manager fund of funds are still in the running for allocations from the big pension and endowment funds.

I spoke with the CIO of an endowment with almost a billion in assets whose name I would like to drop, but can’t. He told me flatly that he has — and will continue to — invest in HFs as small as 40 or 50 million. He has no problem at all putting 5 million into up-and-comers or being as much as 20% of the fund in the beginning. This isn’t benevolence; it’s foresight. He looks at this as a way to get an edge in a growth opportunity.

Apparently, he’s not alone. Pensions & Investments just reported a survey by the Spectrem Group of 81 U.S. endowments and foundations, noting that: “Among endowments and foundations with $25 million to $49 million in assets, 36% plan to focus on alternative investments. Of those with $50 to $199 million, 10% plan to focus on alternatives, and 29% of funds with more than $200 million cited alternatives as an area of focus.” See press release here:

This study is not dramatically different from last year’s Preqin study “The Growing Appetite of Institutional Investors for Emerging Manager Hedge Funds.”

They wrote: “with growing experience institutional investors are now choosing to invest in younger funds, imposing fewer restrictions in terms of assets under management and track record requirements.” See Preqin research news here:

This is essentially what my billion-dollar-endowment-manager said above, but with lots of charts and graphs.

And, regarding size, one of those charts said that only a third of the institutions insisted on a minimum $1 billion AUM. More than half would consider, on their merits, funds under $500 million. More than a quarter would look at applicants with less than $100 million. Eleven percent said they had no rigid size minimum at all.

We did our own internal study, looking just at the endowment space. Among the one hundred biggest U.S. endowments — from Harvard down to University of Louisville — we found the hedge-fund rosters for 41 of them. Of the 116 funds selling to those schools, 18 (about 16%) had less than $1 billion AUM. Eleven (almost 10%) were under $500 million. Only eight of them (7%) ran $100 million or less. That’s a less sunny picture than Prequin paints, but we looked at a narrower group, and besides, nobody said it was going to be easy. [for a copy, send request to]

The head of one major consultant to institutional investors told me last week that they are currently making three times the number of new-business and current-business renewal pitches he saw in prior years. He says that with all the consultant changes on the horizon for next year, investment manager changes will inevitably soon follow.

So, if you’re a baby hedge fund, now is the time to meet your friendly neighborhood consultant. There are probably 50 to 75 firms with a reasonably-sized client base, so don’t be shy.

Kevin Quirk, of CaseyQuirk, the widely used management consultants to investment management firms, told me that seed platforms have been busy this year, funding startup hedge funds. But, unlike a few years ago, they now tend to have seasoned professionals with solid infrastructure, and clearly articulated strategies.

And those fund of funds we spoke harshly about above? Well, hot money is better than no money at all, and they have their uses, too. A pickup from a good FoF can sometimes give credibility to a startup who isn’t getting through any other doors. Our internal study says that 14% of the hedges selling to those major endowments are fund of funds. That’s probably a couple of hundred smaller funds selling, indirectly, to endowments they couldn’t reach directly.

There are channels to carry your message. But you’d better have one that’s worth carrying and you’d better get it out there tirelessly.

A lot of hedgies are more comfortable running spreadsheets than going out and talking — and listening — to people. They will not survive.

It doesn’t matter how brilliant your professors thought you were, how much money you raised back then, or how good your numbers are. If no one hears about it, you’re not in the game.

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