UC to reduce number of hedge fund managers in attempt to decrease costs

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UC Chief Investment Officer Jagdeep Singh Bachher recently announced that the university will attempt to decrease its costs by further reducing its number of hedge fund managers, who manage about $2 billion of the university’s endowment of $8.8 billion in assets.

Controlling costs has been a priority of the UC Office of Investment for the past couple of years, according to UC spokesperson Kate Moser. This latest decision, announced at a Feb. 26 UC Regents Committee on Investments meeting, precedes a March 1 report by the labor union AFSCME Local 3299, which criticized the university’s hedge fund investments.

“If you can bring your costs down even farther than they already are, then that’s just more money coming back to the university to reinvest,” Moser said.

According to Moser, the university is reducing the number of external managers in multiple asset classes, such as stocks or bonds. Moser said the university now has fewer than 30 external managers and fewer than 25 hedge fund managers.

Moser said in an email that the university invests in both the bond market and the stock market to maximize its returns. This type of diversification is not unusual, according to Raymond Hawkins, a lecturer in the campus department of economics and a former hedge fund manager.

“Hedge funds play an important part in our investment mix because they reduce the overall volatility of the portfolio while also providing a source of returns,” Moser said in an email.

These types of investments can be complicated, Hawkins noted, because it is difficult to determine the value of the managers based on profit. It is not necessarily problematic to report a loss, though it is problematic if a manager promises to deliver returns but underperforms.

Developing investment strategies for private equities with internal managers would be too expensive for the university, Moser said, so the university employs external managers who charge management and performance-based fees.

“Reducing the numbers of external managers reduces our costs,” Moser said in an email. “If there are cheaper ways to achieve what hedge funds can deliver, we certainly pursue the more cost-effective solutions.”

Hawkins said it is typical to pay managers both set fees and performance-based fees. The set fee is usually a small percentage of the assets they are managing and the performance-based fee is a larger percentage that provides incentive to profit.

AFSCME spokesperson Todd Stenhouse said, however, that the university needs to be more transparent, particularly regarding the fee structure it uses.

“I think it’s important that (the fee structure) be specifically quantified so that the public knows that we’re getting value out of those investments,” Stenhouse said.

The American Federation of State, County and Municipal Employees’ report claimed that the university could have saved more than $950 million in fees paid to hedge fund managers.

Stenhouse noted that there should be more stakeholder engagement and that investments should reflect the university’s core mission of quality and affordability.

“We all have to work together to make sure we are getting the best possible value from the resources we have,” Stenhouse said.

Contact Patricia Serpa at [email protected] and follow her on Twitter at @pserpa_dc.