The Skorina Letter No. 3

Charles Skorina looks at people and issues in the world of Endowments, Foundations, Hedge Funds and Alternative Investments

I'm in the executive search business, so I should love to see leadership turnover. And lately I'm seeing a lot to love. But most people shouldn't be looking at it from my perspective.

People responsible for institutional money should want to see as little turnover as possible. Every new chief investment officer has to build up mutual confidence with boards, committees and colleagues; communicate an investment philosophy; and be given enough time to have his performance fairly judged. When that door revolves too fast, it often results in confusion, demoralization and loss of precious institutional memory.

These are extraordinary times, and it's hard to judge the wisdom of individual moves from the outside, but that door does seem to be spinning at unusual speed in many places.

For instance:

Maurice (Maury) E. Maertens, CIO of New York University's $2 Billion endowment, retired at the end of July. And it appears that his able subordinate Tina Surh, veteran of the Princeton investment company and a Harvard MBA, will not get the job. A lot of institutional knowledge went out the door with Maury, and it will be interesting to see who fills the slot.

And...

Patrick O'Connor, who became University of Arizona's first CIO less than three years ago, left this summer for a job at Cook Children's Hospital in Fort Worth. He inherited a generic 70/30 allocation and wrestled it into something more flexible and sophisticated: four broad categories of equities, fixed income, real assets and cash; with hedge funds and alternatives residing in each of the first three. But he also carefully tuned the portfolio to the specific risk preferences of Arizona's investment committee. He said, awhile back, that "the largest obstacle I see over the next five years is not utilizing this opportunity that the markets have made readily apparent." Now, someone else will have to complete that five-year mission.

And...

Josh Kaplan, hired as Drexel University's first CIO in 2007, just left, quietly and suddenly. Like O'Connor, he inherited a traditional long-only stocks-and-bonds portfolio and began shifting into alternatives. Maybe it was too much, too soon. Just three weeks ago the school's interim president wrote that Drexel's endowment had performed relatively well versus equity indexes and peer institutions, and had posted double-digit gains so far in this calendar year. Then he thanked the CFO, Thomas Elzey, and made no mention at all of the CIO who had run the portfolio for the past two years. Sic transit gloria and so forth.

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And now some thoughts from clients, colleagues, and passing strangers about the big economic and investment picture in these interesting times:

We've been reminded lately that if you are committed to cashing out 5% of your portfolio every year for as far as the eye can see, you'd better make sure you're seeing far enough.

The alternative-rich endowment model pioneered by the Big Ivies rose in the (mostly) fat years of the 80s and 90s, including their relatively short and mild recessions. It had never been tested in the kind of bone-crushing slump we are now living through. And someone should have noticed the implications for portfolio liquidity when, inevitably, such a slump finally arrived.

In fact, someone did: my fellow Chicago alumnus, Larry Siegel.

Larry was a long-time strategist for the Ford Foundation (just retired in August) and he wrote a paper early last year that was prescient. "Alternatives and Liquidity: Will Spending and Capital Calls Eat Your 'Modern' Portfolio?" appeared in the Fall 2008 issue of the Journal of Portfolio Management about the time Lehman's employees were cleaning out their desks.

He looked at how an alternative-heavy portfolio would stand up to three different economic scenarios. The worst-case was a "black swan" meltdown of the kind we've actually enjoyed. And his conclusions about liquidity lockups were pretty prophetic. Three months ago, he got to go to Paris and pick up the first EDHEC-Robeco prize for his work.

It includes practical suggestions on how to avoid a future cash crunch by laddering gradually into alternative assets. It's remarkably lucid and light on the math. Even I understood it. It's not available online, but Larry's graciously allowing me to send a copy to anyone who wants to read it. See my email address listed below.

Two weeks ago he presented on the same topic at the Foundations and Endowments conference in San Diego and was able to compare his what-if scenario to recent events.

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Investing in Jurassic Park...

As of January, the top 100 hedge funds control $1.03 Trillion of the total $1.4 Trillion in hedge fund assets, according to Chicago based Hedge Fund Research and Euromoney Institutional Investor's Alpha magazine. And the ten biggest funds control about one-fourth of the whole pie: $324 Billion.

So, three-fourths of all hedge money is in 100 firms, and one-quarter of it is in 10 firms. So how do they make the big, bold bets when every move they make roils the market? They ARE the market!

But there are still 2000 to 4000 hungry little hedge funds with about $400 billion, ready to scamper between the legs of the dinosaurs. They don't shake the earth, but they're way more maneuverable, and often produce superior returns.

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Don't forget the Connecticut Hedge Fund Association's Global Alpha Forum on November 5th at the Hyatt Regency in Greenwich, CT.

John Thain, the former (and final!) CEO of Merrill Lynch will open the conference on Thursday, and have a chance to get it all off his chest.

Dr. Richard Sandor of the Chicago Climate Exchange will offer a preview of the dreaded and/or longed-for Cap-and-Trade regime. Plus many other academics, gurus and practitioners from all over.

If you have any plans to head back east for some pre-holiday studies, shopping, or bonding with relatives, we would love to see you.

The Agenda and a link to registration form is here:

http://globalalphaforum.org/agenda.html

Register Now!

All thoughts, comments, and career moves are welcome. To comment or unsubscribe please email me at skorina@sbcglobal.net.