01/12/2011

Arizona Pension Eyes Fund-Seeding Program

Arizona Public Safety Personnel, which began investing in hedge funds only two years ago, is now contemplating seed investments in startup managers.

Ryan Parham, chief investment officer of the $6.5 billion pension system, said he hopes to get a seeding program off the ground by yearend. Still to be decided are how to structure the investments whether the pension would seek a stake in the business, a cut of profits, or what and how much to invest in each manager. The pension's hedge fund consultant, Albourne Partners, would advise Parham on manager selection.

It would be a big move for Arizona Public Safety Personnel, considering that few public pensions of any size have ventured into the high risk/reward realm of seed investing. Calpers, for instance, has given serious thought to seeding hedge funds, but has yet to make any investments. New York Common Fund is currently searching for a manager to run a seeding program.

The Arizona pension has been steadily growing its hedge fund portfolio since making its initial investments in early 2009. Most recently, it allocated $40 million last month to an emerging-market debt fund called Iguazu Partners.

It's unclear how much the pension has invested in hedge funds overall, since it doesn't have a separate hedge fund portfolio. Instead, it invests opportunistically across its entire portfolio. Research firm Preqin recently pegged the pension's hedge fund assets at about $470 million, but that was before the Iguazu investment.

The pension has exposure to more than 70 managers, both through funds of funds and direct investments. Among the managers it works with are Davidson Kempner, FrontPoint Partners, LSV Advisors, Luxor Capital and Och-Ziff Capital. Parham told the pension's board last month that he planned to maintain a $75 million investment in FrontPoint, despite a federal investigation into insider trading. FrontPoint hasn't been accused of wrongdoing.

Once the seeding program gets going, Parham and his team are expected to lean toward proprietary-trading teams cut loose by Wall Street banks. Parham said he has talked to several other public pensions that might be interested in investing alongside Arizona Public Safety Personnel.

A Preqin study released last month found large institutional investors such as pensions and endowments are increasingly interested in backing hedge fund managers via seed deals. Since the financial crisis, capital-starved managers have been eager to sell pieces of their business or a cut of profits often on terms seen as very favorable to seed investors.

The Preqin study, based on a survey of 1,000 institutional investors, found 21% are interested in making seed investments up from 11% the year before.

Back Print