Valued Advice

Memorandum

To:         Bea Wethervane, Senior Consultant, Coxbridge Associates

From:     Hugh G. Shortphall, Florida University & College Teachers Pension Fund (FUCT)

Date:      31st May, 2013

Subject:  Hedge Fund Allocations

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I've appreciated your valuable advice to our plan over the years. As you know, the path to changes in orthodox investment policy in a plan such as ours is often long and arduous, particularly when trustees and oversight committees are involved. Witness our struggle to add mortgage derivatives, or expand our equity allocations with a dedicated BRIC component which we finally received approval for, and implemented in 2007. Our campaign to add a GSCI Commodity Index component, as per your recommendation, was not easier, though with your help, we finally gained approval for and deployed it in mid-2008.  Your 2009 advice to implement a dedicated equity tail-risk program - one that we finally allocated to in Sep 2011 - was a big-step forward towards insuring our Board, Trustees (and plan members) could worry less about funding levels in the event of a market crash. 

Over the past few years, you've been tireless supporters of substantially increasing our hedge fund allocations, and, as you know, last year, we recently ramped up these allocations (taking funds from our long equity exposure).  I want to say, we trust your advice implicitly in this regard. However, we on the investment committee have been taking a lot of heat lately on this last decision - both at the tactical and the strategic levels. Not a day goes by without our Board and Trustees reading about overly-generous fee structures, poor manager and strategy performance, and asymmetrical division of the resulting aggregate investment return. As the chief internal supporter, I would be grateful if you could "do the rounds" with the Board and Trustees in order to reconfirm the thesis for this last decision in detail - something that would take the heat off me, and to the greatest extent possible, help you when Coxbridge's consulting contract comes up for renewal. In particular, they keep asking me "where are the scheme members' yachts (or Gulfstream IV's)", quoting figures that over the past decade, in aggregate, managers have pocketed $700 billion in gains whilst fund investors have gained a mere $12 billion net of fees. These concerns need to be addressed, and fears assuaged.

On a more positive note, I am pleased to say that as of the beginning of this year, we've finally completed the implementation of your advice to take replace more of our long-only equity with an allocation to several risk-parity managers. Indeed, as of January, levered bonds and reduced equity appear set to make a meaningful contribution to meeting the Plan's actuarial targets.