Texas Employees Retirement System expects up to 5 new hedge fund investments in FY22

According to the agenda for the August 26 board meeting, Employees Retirement System of Texas will review its hedge fund tactical plan for FY22.

The Absolute Return Growth Portfolio is a risk-mitigating portfolio while the Directional Growth Portfolio is a return-seeking portfolio.

The Absolute Return Portfolio at $1.48 billion is currently 4.5% of total assets, below its stated 5% target. The targeted allocation will remain at 5% but there is further flexibility given the allowable strategy bands of 0-10%. Expectations are for up to five new investments during FY22. Opportunities are seen in event driven, global macro, relative value and opportunistic.

Emphasis will be on diversifying strategies to complement existing allocations. Focus remains on strategies within developed markets that are either liquid or illiquid.

The initial focus will be on event driven strategies as these carry more directional market exposure and will benefit from an improving economic environment. Diversifying aspects might include adding a manger in a new geography with a smaller asset base. In other instances, this could be to a more traditional strategy that is lacking within the portfolio. The ERS hedge fund team remains positive on event driven strategies given the uneven economic recovery. This should to more corporate events including M&A, restructurings, divestitures, spin-offs etc.

Within global macro consideration for new investments could occur within commodities. This is due to its historical low correlation to other hedge fund strategies. Further time could be spent looking for additive discretionary global macro exposure.

The Absolute Return Portfolio currently has 15 managers but one will be fully redeemed by the end of June while another holds de minimis investments. When fully invested, it is expected that the portfolio will have 15 to 20 allocations. The largest allocations are primarily to multi-strategy managers that have diversified portfolios and long track records. ?Over 70% of the portfolio is allocated to North America and Europe.

Relative value comprises 28.2% of the Absolute Return Portfolio while event driven accounts for 27.4%.?Equity long/short is 18.8% of the portfolio while global macro is 17.7% and opportunistic is 7.9%.

The Directional Growth Portfolio will remain dormant until further notice and there are no new allocations planned for FY22. The portfolio currently consists of one hedge fund allocation – Marshall Wace Tops World Equities Fund – which has a current allocation of $475.9 million.

The ERS Hedge Fund team continues to evaluate emerging hedge fund managers for the PAAMCO Prisma Launchpad relationship. Given the increased commitment of $175 million, expectations are for two to four new allocations over the next one to three years.

The first seeding transaction was made to Cinctive Capital and the second to Phase 2 Partners. The latter has a financial sector focus and was a spinout from Philadelphia Financial.

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