institutions

Some institutions face forced sales due to allocation targets

Jim Kim — Tue, 18 Nov 2008 07:56:32 -0500

Fortune notes that some institutions have very strict allocation targets for various asset classes. The Harvard endowment, for example, has a 13 percent target for private equity investments. While the value of the overall portfolio (the denominator) has been plunging as the market sells off, the numerator (the value of specific, less liquid asset classes) has stayed roughly the same because such assets are priced less often. The result is that some institutions are bumping up against allocation targets, requiring some big-time selling. Harvard and Duke are among those who are selling. "Practically every big endowment or pension fund soon will be putting something up for sale," Fortune notes. The secondary market certainly seems willing to take a look.

For more:
- here's the article

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Private equity news from FierceFinance

When diversification is a bad thing

Jim Kim — Tue, 04 Nov 2008 16:57:46 -0500

Nobel prizes have been won in pursuit of the simple fact that diversification is a good idea. But there are times when it seems like an awful idea. For big pensions, now may be one of those times. The Economist takes a look at the movement for institutions to be "more like Yale," that is more, more diversified across asset classes. It seemed like a great idea and helped ignite the movement to acquire assets uncorrelated with the stock market. But in the short term anyway, it's not working out that way.

There are two problems. One is the fact that so many asset classes were fueled by low rates, which encouraged the use of leverage to buy into lots of asset classes and created lots of correlation. Private equity was fueled by low rates, as was the stock market. The problem is the relative illiquidity of certain assets (of the credit variety). In general, diversification has not been kind to pensions. But it's hard to argue with the concept. The search for uncorrelated alpha is still very much in place.

For more:
- here's the article

How far will hedge fund woes spread?

Jim Kim — Fri, 24 Oct 2008 07:47:53 -0400

It's no secret that hedge funds both large and small are having a rough year. Is the pain about to spread to retail customers? Business Week certainly thinks so. "In the coming months, hundreds of hedge funds may shut their doors, sparking a massive fire sale on all sorts of investments. Just about anybody with a 401(k) or pension plan will feel the pain, since the sell-off will only exacerbate the plunge in stocks, bonds, and commodities--which make up the core of most people's portfolios." That's dire. My sense is that it will be a bit more orderly than an all-out asset dump. You can bet there's an awful lot of negotiating going on right now. Hedge fund execs likely have never been so humble. Big institutions would be wise to use the situation to gain leverage and better terms.

For more:
- here's the Business Week article

Institutions rethinking hedge funds?

Jim Kim — Wed, 15 Oct 2008 13:59:03 -0400

A few months ago, people were willing to acknowledge the pain in the hedge fund world, but they clung to the notion that demand from institutions was still strong, even in the face of a credit crunch. But as the crunch deepened into a world crisis, that seemed like a harder position to hold. IDD notes that inflows into hedge funds have dropped to a mere $28 billion globally in the first half of this year, compared with $117 billion in the same period last year (Hedge Fund Research). We're starting to see more reports of big pensions, perhaps under pressure, taking a closer look at their alternative investments. It remains to be seen if this leads to a real trend away from hedge funds. If so, it would leave pensions right back in the quandary they were trying to remedy: how to fund get the extra bang they need to meet expected payments someday. Will we see more of a liability-driven approach?

For more:
- here's the IDD article (for FierceFinance readers)

UBS to settle ARS issues for nearly $19.4 billion

Jim Kim — Fri, 08 Aug 2008 12:40:09 -0400

We thought Citigroup might become the poster child for the auction rate securities scandals--yes we can now use that term--given the fact that New York regulators are convinced they destroyed a lot of evidence. But Citigroup's deal to buy back $7 billion in auction rate securities from individuals, along with a $100 million fine, looks like a pittance compared to what UBS will buy back: $19.4 billion worth of securities. That's a huge sum. Merrill Lynch, another big ARS player, has agreed to buy back $12 billion. That Massachusetts was able to extract so much from UBS says a lot about the strength of the case, and the extent of UBS's sales the retail level. This is certainly another black eye for UBS. Recall the tax evasion scandal that is still percolating along. We will likely see similar deals involving other institutions trickle out soon.

For more:
- here's an AP article

Citigroup to buy back auction rate securities

Jim Kim — Thu, 07 Aug 2008 07:30:08 -0400

We've seen a lot of activity on the auction rate security front recently. We may start seeing some settlements. The New York Times reports that Citigroup is nearing a deal with federal and state authorities that might result in the bank buying back about $7 billion in auction rates securities from retail investors. It's unclear if securities will be bought back from institutions and corporate investors. Citigroup will also pay a fine--$100 million to New York and $50 million each to about 12 states. The SEC may ultimately levy another fine. This will have implications for other investigations and may set a precedent regarding other banks, notably Merrill Lynch, which has been charged by Mass. Ultimately, we'll also likely see a host of private suit settlements that will certainly add to the costs of the ARS mess.

For more:
- here's the New York Times article

Covered bond market to become a reality

Jim Kim — Tue, 29 Jul 2008 08:13:12 -0400

The Treasury, after talking to 50 or 60 institutions, is pushing for the creation of a "covered bond market" as a way to provide liquidity to banks while assuring investors their money is safe. Basically, such bonds are underwritten by banks and are linked to mortgages kept on bank balance sheets (they will not be sold into a secondary market). One twist is that if a mortgage runs into trouble, it would be replaced in the mortgage pool, something that should entice bond holders. The bond payments would be only indirectly tied to mortgage payments: The bank will set the terms as it sees fit. Bank of America will likely be the first to issue a covered bond; it has experience in Europe and issued such a bond back in June 2007, according to media reports. JPMorgan Chase, Citigroup and Wells Fargo will follow. Top investment banks have apparently agreed to make markets in these securities.

For more:
- here's a Washington Post article

Hedge fund performance in perspective

Jim Kim — Fri, 11 Jul 2008 13:27:19 -0400

The average hedge fund lost 0.75 percent in the first half of the year. Some were quick to point out that the decline marked the worst first-half performance since the 1990s. But Breakingviews notes that the Standard & Poor's 500 has fallen 13 percent since the first of the year. Compared to that, hedge funds have performed mightily, so it's fair to say that the first-half loss will not prompt a lot of soul-searching among investors. If anything, institutions want to allocate more to hedge funds. That said, big losses in specific funds will leave a sour taste in many a mouth. My guess is that the big winners that will emerge from all of this are the funds of funds that show real fund-picking acumen.

For more:
- here's a Breakingviews article

Institutions betting on 'core satellite on steroids'

Jim Kim — Tue, 08 Jul 2008 13:55:38 -0400

The notion of core-satellite investing seems to be regaining some of its old popularity, according to Pensions & Investments. More institutions, ever mindful of costs and ever in need of enhanced returns, are seeking to invest in funds that offer a core portfolio, essentially a passive-type product, coupled with various satellite investments in highly concentrated equity portfolios of perhaps 15 to 20 stocks each. Obviously, this is in keeping with the trend toward separating alpha and beta. All too many funds charge alpha-premised fees for beta-like returns. Not a good deal for investors. The risks may rise a bit but institutions know what they are doing, and what they are paying for.

For more:
- here's the article

And the biggest investors in hedge funds are...

Jim Kim — Wed, 02 Jul 2008 12:29:12 -0400

So here's a question for you: Who provides hedge funds with the most investment money? Most of us would answer--in knee-jerk fashion--institutions, of course. We would be wrong--and right. Pensions, endowments and foundations still provide a hefty chunk to the hedge funds on average at 13 percent, and an additional 23 percent via funds of funds, notes research from Greenwich Associates and Global Custodian, cited in FINalternatives. But high net worth individuals still provide the most at 37 percent. Still, when it comes to big hedge funds, institutions have indeed taken over. They account for 25 percent of assets, while individuals account for 22 percent.

For more:
- here's the FINalternatives article