State Street Global Advisors, the investment management arm of State Street Corporation, and the largest institutional fund manager in the world, has announced that it has been appointed b
State Street Global Advisors, the investment management arm of State Street Corporation, and the largest institutional fund manager in the world, has announced that it has been appointed by the UK Universities Superannuation Scheme to manage a USD200m hedge fund replication mandate. The idea is to replicate the average performance of a universe of hedge funds through indexing. The portfolio will be specifically tailored to meet universities’ investment objectives and will be separately managed by SSgA.
SSgA has worked in conjunction with leading hedge fund academics Bill Fung and Narayan Naik of London Business School, and David Hsieh of Duke University, as well as the consultant firm of JTP Partners, in developing a unique offering for USS.
This offering, hedge fund beta replication strategy, is aimed at replicating the average performance of a universe of hedge funds through modern indexing techniques based on Fung, Hsieh and Naik’s sophisticated analysis of the investment returns of hedge funds.
USS is one of the first UK pension funds to recognise the importance of hedge fund replication strategies as part of its commitments for alternative investments.
‘We are convinced of the merits of hedge fund replication as a way of gaining transparent, liquid and low-cost exposure to the risk premia that drive the majority of hedge fund returns. We see this strategy as a core part of our approach to investing in hedge funds alongside our single manager hedge fund programme,’ says Michael Powell, head of alternatives at USS.
‘We are pleased to be working with SSgA and the partnership it has forged with Professors Fung, Hsieh and Naik, to bring the benefits of hedge fund replication to USS. We are pleased to appoint JTP Partners as consultants who will provide ongoing, independent risk management on the portfolio.’
Academic analysis has shown that up to 85 per cent of returns observed by the average hedge fund of funds can be attributed to a collection of risk premia of market returns rather than the active management skills of hedge fund managers. These risk premia include equities, credit, bond market duration and market volatility, all of which can be replicated by SSgA.
The underlying philosophy is that average hedge fund returns can be achieved at a significantly lower cost by constructing portfolios using model-based factor exposures. For many investors, the cost savings, the diversified collection of beta, and the avoidance of manager-specific risk can make synthetic hedge fund replication an appealing alternative to direct hedge fund exposure.
Says Kanesh Lakhani, managing director for SSgA in the UK, ‘Investing in hedge funds presents a number of challenges, for example: selecting today the manager that will outperform in the future; transparency; limited capacity; manager specific risks; and high costs. The hedge fund beta strategy aims to address those concerns,’
‘This strategy offers clients the opportunity to adopt a core/satellite approach to hedge fund investing. Increasingly, clients insist on separating investment portfolios into alpha and beta returns. The hedge fund beta strategy allows clients to make a passive allocation to access beta, and to only pay hedge fund-like fees where they can identify genuine hedge fund alpha producers.’
Lakhani adds, ‘We are delighted with this mandate from USS. The strong interest we have seen from clients globally in hedge fund beta suggests this could be the first of many new clients to adopt this innovative approach to accessing hedge fund returns.’
State Street Global Advisors, the investment management arm of State Street Corporation, delivers investment strategies and integrated solutions to clients worldwide across every asset class, investment approach and style. With USD2trn in assets under management at 31 December 2007, State Street Global Advisors has investment centres in Boston, Hong Kong, London, Milan, Montreal, Munich, Paris, Singapore, Sydney, Tokyo and Zurich, and offices in 27 cities worldwide.
