NC Pension System Singles Out Fund Types

North Carolina Retirement has started exploring how it might deploy more capital to hedge funds.

The effort marks the next step after Gov. Pat McCrory signed a law in August that increased the $80 billion pension system’s capacity for a range of alternative investments. When it comes to hedge funds, the organization earlier this month launched an assets-and-liabilities study looking specifically at commodity funds, global-macro vehicles and multi-strategy products — areas where it is thinking about putting some $2 billion of fresh capital to work.

As part of the process, North Carolina Retirement officials already are meeting with potential managers. They are expected to release a request for proposals by yearend. It remains to be seen how the organization might divvy up the capital among the fund types under consideration. “They’re doing some initial diligence to know the market, to decide how to put it out,” one source said.

The potential investments would amount to 2.5% of North Carolina Retirement’s assets, on top of an existing hedge fund allocation of 2.9% that works out to some $2.3 billion. Of that amount, more than $2 billion resides within a basket for “credit-strategies” funds. The rest — part of a “hedged equity” designation — consists of $260 million of fund-of-funds stakes that the pension is unwinding due to poor performance.

Despite its status as an active investor, North Carolina Investment doesn’t maintain a specific allocation for hedge funds. Rather, it divides its positions between the credit-strategies and hedged-equity buckets — which in turn are among five alternative-investment categories.

Overall, the pension system has a 35% ceiling for alternatives. Credit strategies can make up 7.5% of overall assets, up from 5% with the passage of the new law. Hedged-equity investments come with a limit of 8.5%, up from 6.5%, and presumably would be where exposures to commodity, multi-strategy or macro vehicles would be parked.

The increase to North Carolina Retirement’s alternative-investment limit comes as the pension is working to fill an $800 million funding gap. Its hedge fund investments returned 9.2% during the 12 months ended April 30.

Commodity and macro funds haven’t been doing as well, but nonetheless continue to attract capital. According to BarclayHedge, the Barclay CTA Index was down 3.1% for the first nine months of 2013, but managers in the sector experienced more than $1 billion of inflows in August. The Barclay Global Macro Index has eked out a 1.5% gain for the year, thanks in part to a strong September, with inflows of $1 billion in August. Multi-strategy funds have fared better, with the Barclay Multi Strategy Index up 6.1% year-to-date amid August inflows of $1.5 billion.

State Treasurer Janet Cowell oversees North Carolina Retirement, which has used Albourne as a hedge fund consultant.

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