11/30/2011

Texas Endowment Favors Direct Investment

Texas Permanent School Fund is planning to revamp its $2.5 billion hedge fund portfolio by abandoning funds of funds in favor of single-manager vehicles.

Like other endowments that have recently made similar moves, the $25.5 billion operation sees the shift as a way to save on fees. Its investment team has begun discussing criteria for manager selection, and plans to submit a proposal to the state’s Board of Education in January.

Texas Permanent’s investment staff then will begin identifying potential investments in single-manager funds, which it would present to the Board at an April 18 meeting. It remains to be determined how quickly the operation would reallocate capital from funds of funds to direct hedge fund investments, where it currently isn’t a player.

At a finance-committee meeting earlier this month, Texas Permanent chief investment officer Holland Timmins reported that moving to direct investments in hedge funds would save the endowment an estimated $114 million over five years — owing to the fact that funds of funds charge a second layer of fees. The endowment has paid $72 million of fees to fund-of-fund operators since getting into the sector four years ago, he said.

Transferring capital to single-manager funds also would help Texas Permanent respond more nimbly to other issues within its portfolio. For example, it recently placed K2 Advisors on an internal watch list due to underperformance. Earlier in the year, it pulled $400 million from a Goldman Sachs fund of funds amid concerns about staff departures and directed the money to GAM.

Texas Permanent’s hedge fund portfolio — dubbed “Raven” — currently amounts to 10% of its overall assets, with a limit of 25%. It encompasses five mandates of $200 million to $800 million with Blackstone Alternative Asset Management, GAM, Grosvenor Capital, K2 and Mesirow Advanced Strategies.

Texas Permanent provides funding assistance to public schools in the state and guarantees their debt issues.

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