April 19, 2004
Reaching across the hedge
Symposium strengthens McCombs School’s ties to hedge fund industry
By Tom Gerrow
Success has a way of attracting attention. That certainly seems to be the case with the hedge fund industry, where an influx of assets and investment talent is fueling rapid growth. Investors appreciate the focus on absolute returns and diversification that hedge funds provide, while industry professionals enjoy both the investment management flexibility and potentially high financial rewards.
Emerging trends in the fast-growing field came into focus at the second annual Texas MBA Hedge Fund Symposium, held April 15 in Austin.
“We created the conference to give MBA students a well-rounded view of the hedge fund industry and the many opportunities in it and also provide hedge fund professionals with information on relevant industry topics—marketing, regulations, and institutional investment,” said Holly Goodrich, McCombs MBA ’04 and co-founder of the Texas MBA Hedge Fund Organization.
More than 170 McCombs MBA students and hedge fund professionals gathered at the Stephen F. Austin Hotel to share ideas and discuss opportunities in the industry. Featured speakers included Bob Boldt, CEO at UTIMCO; Kirk Strawn, director of Intermediary Sales at Man Investments; Eliot Raffkind of the Akin Gump law partnership; and Tom Meredith, CEO of MFI Capital.
Adding value, reducing risk
Boldt’s has seen hedge fund allocations rise significantly during his tenure as CEO of UTIMCO, which oversees investments for the University of Texas and Texas A&M systems, collectively one of the world’s largest educational endowments.
“Our target today is 25 percent for hedge funds, slightly more than our U.S. equity percentage,” Boldt said.
“The reason we invest in hedge funds really comes down to something that we call Potential Value Added,” Boldt said. “That is a measure in each asset category of the potential for adding value, for earning a return over and above what the market makes available for that asset category. We call that PVA. Our objective has been to focus on those asset categories that have high PVA potential, and that’s where hedge funds come in.”
Hedge funds also play an important role in managing risk in UTIMCO’s portfolio.
“What matters is diversification,” Boldt said. “And because we have a lot more assets in the portfolio today, including assets like hedge funds that are, generally speaking, much less risky than US equities, the portfolio we hold today is much less risky.”
Boldt’s goal at UTIMCO was to add $200 million in PVA per year, reaching $1 billion in 5 years. Instead, it took just 18 months--and of that total, hedge funds accounted for $850 million.
Reaching for new markets
Changing the forum’s perspective from the buy side to the sell side, Strawn addressed some of the new opportunities available in the marketing of hedge funds, especially structured products.
“High wealth individuals, with more than $30 million, are probably pretty well served by the hedge fund industry, but there are not a lot of those people,” Strawn said. “There are a lot of households with a $1 million net worth in the U.S., but because of the way most hedge funds are structured there are some delivery problems.”
Hedge funds are generally structured based on sections 3(c)(1)and 3(c)(7) of the Investment Company Act of 1940, which allow them to avoid registration and regulation as investment companies. This limits hedge funds in significant ways, including capping the number of investors in a hedge fund to 100 or 500 (including the fund manager) and restricting marketing activities.
“If you’re building a business and you can only have 99 clients, you want to try and set your investment thresholds pretty high,” Strawn said. With typical minimum investments of a $1 million or more, this leaves a large portion of potential investors on the sidelines.
Recently, however, some hedge funds have decided to register as investment companies. This allows them to offer registered investment products and has changed the way they do business. They can now advertise and are not limited in the number of investors they can accept. This has allowed some funds to lower their minimum investments.
“Some leading hedge funds and fund of funds now have minimums of $25,000 or less compared to $1 million in 3(c)(1)and 3(c)(7) structured hedge funds,” Strawn said.
Strawn cited one recent study that showed 81 percent of high net worth households had an interest in alternative investments, but only 3 percent of those households had actually invested in them.
“If you have 81 people out of a hundred interested in hedge funds, but only three have actually done something about it, that’s great market share to go after,” Strawn said.
But even as access to hedge funds increases there remain significant obstacles for investors, who must still evaluate risk, fee structures, tax implications and more.
Registering concerns
According to Raffkind, whose presentation focused on the current and future regulatory environment, these difficulties are the reason the U.S. Securities and Exchange Commission (SEC) is taking a careful look at hedge funds.
“The SEC is concerned that as retail registered products become more accessible there are going to be a lot of people out there who don’t understand them,” Raffkind said.
Raffkind also expressed reservations about how many hedge funds would choose to register as investment companies.
“Even if you get to the point where you have to register as an investment advisor, it’s still a huge leap to get to the point where you’re going to be a registered investment company under the Investment Company Act,” Raffkind said. “The Investment Company Act has a lot of cumbersome provisions, so to get to that level of compliance is very significant.”
Still, Raffkind sees some pressure on the SEC to make hedge funds, or at least some of the strategies they pursue, more widely available.
“In the bear market that we’ve recently experienced, the absolute return strategies were obviously much more solid than the relative returns strategies of mutual funds,” Raffkind said. “And yet the only people who could get into these absolute returns strategies are people who have a lot of money.”
Opening Doors for Finance Students
Perhaps the most valuable aspect of the symposium is bringing together students and investment professionals in a collegial atmosphere.
“I thought the symposium was excellent,” said Joe Manning, Head of Prime Brokerage Sales for the Americas for Merrill Lynch, the prime sponsor of the event. “The panels had tremendous industry experience and discussed interesting topics. They were insightful for both industry vets like myself but especially helpful to the students here. Texas MBAs are very bright and very motivated. Today they got a glimpse into an industry that has explosive growth on the horizon and I’m sure we are going to be reading about a lot of these folks in the next couple years as they go out into the industry.”
That’s the sort of recognition that the event’s organizers hope to increase.
“We want to continue building the McCombs School’s reputation within the hedge fund industry,” said Paul Matthews, McCombs MBA ’05 and current president of the Texas MBA Hedge Fund Organization. “As business schools try to differentiate themselves, this is one of the areas you want to be in. There is a lot of opportunity in the industry and as it grows we want to be a part of it.”
The second annual MBA Hedge Fund Symposium, like the first, relied heavily on the support of alumni.
“One of the key benefits of attending the McCombs School at UT is that you have such great access to alumni, and they are very supportive,” Goodrich said. “There are many alumni who come out and help by participating in the symposium, providing career guidance, and even opportunities for internships or employment. Having the symposium is a good way to let them know there are Texas MBA students interested in hedge funds who are working to learn more about the industry.”
For information on specific programs at the McCombs School, consult our contacts page. For media information, contact the Communications Director by phone at 512-471-3314 or by email at CommunicationsDirector@mccombs.utexas.edu.
