Last week, South Carolina treasurer Curtis Loftis said the state’s pension system was looking to work with smaller hedge fund managers.
Loftis told emerging hedge fund managers to “come show up” at pension meetings and to “shake hands…pass out cards.”
Data exists that supports investing with smaller, newer hedge funds.
I’m glad Curt didn’t hand over his seat and think he’s on the right track bringing light to the excessive fees South Carolina’s pension fund is doling out. The guy who said there is no uniform reporting guidelines in fees is partially right but there should be, especially in alternatives like private equity where many state funds are getting bullied into remaining mum on fees and terms.
As far as focusing on emerging managers, there too, I think he’s on the right track. Smaller hedge funds have withered but the irony is they typically outdo their elite rivals. Why? Because their focus is primarily on performance, not asset gathering (2% management fee really kicks in when managing billions, just ask Ray Dalio, Bill Ackman and other oversized hedge fund egos that now figure among the richest Americans).
Are there pitfalls to investing in smaller funds? You bet there are and I warn Curt and others taking this approach not be be penny-wise and pound-foolish. There are a bunch of charlatans in Hedgeland that know how to talk up their game but they’re pure cons. And many smaller hedge funds stink, just like most of their larger rivals. There is also the big issue of scalability, which most smaller players don’t offer or are not set up for.
I’m not a fan of funds of funds but when it comes to identifying and selecting emerging managers, you need to be cautious and find true alpha generators that will offer you a lot more than just performance (knowledge leverage is critical!). Talking to Tom Hill at Blackstone or Jane Buchan at Paamco is a very good idea but make sure you get the terms and fees right when dealing with funds of funds.
South Carolina’s pension system allocated 17 percent of its assets towards hedge funds as of June 30.