The Skorina Letter No. 9

The Skorina Letter
People and issues in Global Investment Management
February 10, 2010

In this issue:

• Pay investment committees
• Hedge funds for everyone
• India versus China

More Work, More Pay: Compensation for Investment Committees?

Chris Bittman, former CIO of the University of Colorado endowment, and now at Perella Weinberg Partners as CIO of their Agility Funds unit, made some interesting off-the-cuff remarks the other day at an investment conference.

He thinks that the workload and responsibility carried by investment committee members justifies paying them for their work, even though nonprofit board members traditionally serve without compensation. It would be a break from tradition, but Chris told me that "the feeling of obligation increases when the stakes are raised and others are keeping score."

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More Alpha, Less Pay: hedge fund indexing, it's coming!

I have a question about hedge fund indexing and performance-replication strategies that nobody has answered to my satisfaction. If, as some people suggest, an investor can now get most of the advantages of actively-managed alpha investing by buying hedge-clone mutual funds, ETFs, etc; then why shouldn't an institution buy these, instead of paying substantial fees to traditional hedge fund managers?

The Wall Street Journal recently reported that the number of new hedge-fund-like long-short mutual funds launched in 2009 nearly doubled to 26, from 14 a year earlier. Investors poured $8.7 billion into these funds in the first 11 months of this year, up from $4.6 billion in all of 2008.

Cliff Asness and his team of quants at AQR Asset Management have been in the forefront of this trend. Their AQR Diversified Arbitrage Fund, launched in January 2009, gained about 9% in its first year. They launched their seventh hedge-style mutual fund just last month: AQR Managed Futures Strategy Fund.

The Journal noted that other traditional hedge managers including Rady, Bull Path and Legg Mason's Permal Group have all launched mutual funds over the past year. They quoted AQR co-founder David Kabiller as saying that attracting small individual investors as well as institutions to the same vehicle "builds a more stable business."

Hedge funds began as a vehicle aimed at and sold to only a restricted group of institutions and affluent individuals, but we see more and more indications that hedge funds or hedge fund-like products are being marketed to ordinary "retail" investors.

FinAlternatives.com reported last week that a young lawyer named Sarah Bernett is doing just that.

"Bernett, a litigator with seven years experience, last year founded a hedge fund advisory, Bernett Capital Management. On Jan. 1, she founded a hedge fund of her own, catering to low- and middle-income individuals with an "unprecedented minimum investment of $1,000."

Meanwhile, Morningstar reported last month that Vanguard has taken another step toward offering an "absolute return" fund, more than two years after Morningstar first reported that they were experimenting with such a product.

To me, this seems reminiscent of earlier Darwinian developments in the marketing of financial products: checking accounts and revolving-balance credit cards, then mutual funds dovetailing with the creation of IRAs and 401Ks, bringing stock ownership to the masses.

So, maybe we're seeing another move in an old game. And, again, my question is: if the masses can now put money into so-called "alternatives," then how does that affect the traditional buyers of those vehicles: the institutions, affluent individuals, and family offices? And what are the implications for hedge funds?

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China versus India: Two Sides of the Asian Looking-Glass

Today, China's GDP is still only a little bigger than Germany's; and India's economy is about the size of Brazil's, according to a Carnegie Endowment study.

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=24195

But that's today. The magic of compounding Asian growth-rates will make our children's world look very different from ours. In 2040, if trends hold, China will slide past the USA, with a $45 trillion GDP versus our $40 trillion and India will be earning "only" about $18 trillion. Everybody else will be far back in the pack.

In the next few newsletters we thought we would look at India and China through the eyes of some boots-on-the-ground investors who know the region intimately.

We have asked Chuck Johnson of Tano Capital, an early investor in the sub-continent, to be our India anchor and Bill Lawton and Doug Metcalf of Seagate Global Investors, who spend eight months out of every twelve in Asia, to be our China champions.

Skorina: Bill and Doug, tell us why you are so committed to China.

Bill: In 1993 I was hired by the Deputy Director of the Central Bank of China. They wanted me to help them set up risk management, trading strategies, and train the trading staff. It gave me a chance to develop the connections and local knowledge that led to founding Seagate. That was eighteen years back, but even then everything we heard from government officials suggested that big change in China was just getting started. Eventually we were able to launch Seabright, a joint venture between Seagate and China Everbright Limited that became a model for later private equity ventures on the mainland.

And, Charles, let me underline something right now. Before anyone invests in China there is one cardinal, paramount fact to keep in mind: The government owns everything, either directly or indirectly, and they determine who wins. Remember that fact and act on it, and opportunities - both medium- and long-term -- are better than almost anywhere else in the world. Forget that rule and a foreign investor has no chance. That's the reality in China.

Skorina: Doug, you mentioned in an earlier conversation that, in one respect, investing in China is no different than anywhere else in the world: you have to "follow the money". What did you mean by that?

Doug: Thanks to a huge stimulus from the China-ASEAN free trade agreement signed in 2002 and the more recent slowdowns and trade restrictions in Europe and North America, the opening of the "China west" has moved southwest to Yunnan Province, and its capital, Kunming.

The Chinese government has designated Yunnan province and Kunming City (in southwest China, bordering Viet Nam, Laos, and Myanmar) as ground zero for a massive development and infrastructure expansion to accommodate this explosion in Southeast Asian trade. Roads, airports, shipping upgrades, factories, apartments, it's all happening now and will be for the next ten to twenty years.

Last year we were officially designated as advisors to the city and provincial government, so we spend a lot of time and energy helping local business and the bureaucracy with development programs. As a result, we have seen this last year a hundred companies I never knew existed. They have the largest toothpaste tube manufacturer in the world, the largest bamboo farm in the world, huge solar projects.

By the way, the Chinese are far more committed to green projects than reports in the Western press would lead you to think. And the economies of scale they are getting with some of these projects are amazing.

I can't stress enough, however, the importance of working with the city and provincial government as well as local businesses. In China they say that "if it's not a good deal, then everyone is invited". As a foreigner, you are only allowed to invest in the good deals if they know you, have worked with you, and feel you have earned it.

Skorina: Chuck, you've just heard Doug and Bill extol PE and VC investing in China. What do you think?

Chuck: I have a number of investments in China, visit the country often, and I too am optimistic about their long-term prospects, but I still have to wonder why India hasn't been getting more love these days. After all, Prime Minister Singh was actually elected to his office, while democracy is not on the Chinese agenda.

Even if you agree with the Chinese that democracy is just a distraction if you're trying to get rich, you have to remember that India will likely be one of only three economic super-powers still standing in thirty years. China will be huge, but diversified investors need to have chips in the other Asian growth-machine, as well.

And let's not forget a few facts that aren't always given enough weight. Virtually all business in India is conducted in English. And they have a respected court system. It can be slow and unwieldy, but in the end, contracts are usually enforced, so you don't have to bet everything on the whims of government officials. Last, but not least, they have a thriving free press. No Google censorship in India. Tracking and understanding business conditions and assessing risk still requires local knowledge, of course. And established relationships are essential. But an English-speaking foreign investor can operate on something close to a level playing-field.

Skorina: But isn't the planning and execution process much more efficient in China?

Chuck: Not necessarily. In regards to what Doug and Bill said about who wins and who loses in the Middle Kingdom. In China, it's true that the government drives everything. But this means that overall capital investment is planned from above. And we don't have to look much beyond Russia's recent past, or even India during the years of the "License Raj", to see the distortions that central planning and government controls can cause. Eventually, those distortions have to be corrected, and the result usually isn't pretty.

Indian government bureaucracy is still formidable, but much less onerous than a decade ago. The government is more a clumsy middle-man than an absolute arbiter of what gets built by whom. Permits can take longer than in China, but, once those issues are resolved and management is in place, buyers are standing there with cash in their fists. Rising middle-class demand for everything means that profits are almost locked-in if you have a decent business proposition.

So, in India, we look for the entrepreneurs and companies that can get things done, that have a track record, and ambition. In India, all apartments are full, with buyers waiting for every completion, every car, and every shop opening. All roads are at capacity and lead to crowded destinations. Just build it: cell-phones, cars, apartments, appliances, financial services. Build it and customers are waiting to buy it.

Skorina: So, guys, if I could sum up what I think I've heard here in our first round of discussions: In China, you place your bets on the government official or agency that will sponsor the deal. In India, the winning horse is the individual business with the smarts and stamina to get through the bureaucratic gantlet and reach the customer.

To be continued...

Seagate Global Investors: http://seagateglobal.com/china-asean-investments/pages/china-asean-investments.html

Tano Capital, email: etan@tanocapital.com

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Less Work, More Pay: Federal Workers Are Really Skilled; Just Ask Them!

Our readers are a sophisticated group, but we suspect that even for them the workings of our government are sometimes hard to fathom.

But now and then a single flare lights up the whole apparatus.

USA Today reported on December 12 that:

1. When the recession started, the U.S. Department of Transportation had only one person earning a salary of $170,000 or more.

2. Eighteen months later, more than sixteen hundred DOT employees have salaries above $170,000.

Some Congressperson is quoted as saying: "There's no way to justify this to the American people."

But then, someone stepped up and justified it anyway. It was the Government Affairs Director of the Federal Managers Association, saying that the federal workforce has to be highly paid. Why? Because it employs skilled people.

So there you go, silly Congressperson. When the recession arrived, sixteen hundred federal employees pulled up their socks and acquired buckets of new skills. The American people should be gratified that they rose to the occasion.

In fact, there has been no recession whatsoever among the highly-skilled federal workforce. In the private sector, nonfarm payroll jobs dropped by 150,000 in December and 20,000 in January. But the federal civil service created 33,000 new positions in January alone (only 9,000 of them temporary census jobs).

The average federal worker makes $71,000. The average private-sector worker makes $40,000. Following the logic of the Federal Managers Association, we infer that federal workers are 78% more skillful than private-sector workers. And, apparently, they're getting more skillful by the hour.

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Charles A. Skorina & Company
Executive Search Consulting
415-391-3431
skorina@sbcglobal.net

History:

• JPMorganChase - Credit and risk management
• Ernst & Young - Systems and process consulting
• US Army - Russian Linguist, Japan
• University of Chicago, MBA, Finance
• Michigan State University and MIIS/Middlebury College
• Culver Military Academy

The Skorina Letter No. 8

The Skorina Letter
People and issues in Global Investment Management
January 21, 2010

In this issue:

• Hedge funds hunt for talent
• Another day another scandal
• Three keys to hedge fund performance

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Connections:

Chief investment officers and hedge fund managers have reasons for hiring and reasons for moving, and I am regularly asked for help with both situations. If there is a fund looking for talent, or an investment professional looking for a change, we are happy to post your news, or to help you with referrals.

Chief Investment Officer Opening:

A major community foundation, the $3.1 billion California Endowment in Los Angeles, is searching for a chief investment officer. René Goupillaud, the former CIO, left about six months ago and Jesse Casso, a board member and managing partner of private equity firm Casmar Capital Partners, has been running the investment process on an interim basis.

Here is the link to the position description: http://www.calendow.org/Article.aspx?id=4246 Hedge

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Funds Hunt For Talent:

Sandalwood Securities made Mihir Meswani an offer he couldn't refuse.

Sandalwood, a $1 billion credit fund of funds, has hired Meswanit away from the Robert Wood Johnson Foundation, where he had run their hedge fund, traditional equity and fixed income portfolios. The Johnson Foundation controls $8 billion, but even the biggest nonprofits have trouble holding talent when a hedge fund really wants someone and shows up waving show-biz money.

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Lessons Learned from the Wesleyan Endowment Affair:

In previous issues we prominently mentioned the strangely quiet departure of Wesleyan University's endowment CIO Thomas Kannam back in October for reasons that no one involved was quite willing to discuss. It appears now that the "other interests" he supposedly left to pursue are mainly going to involve defending himself in court.

Vigilant student reporters at the campus newspaper, and Gillian Wee at Bloomberg News, have revealed that Wesleyan, with a current endowment of approximately $520 million, is suing Mr. Kannam for a host of transgressions including fraud and breach of fiduciary duties. The allegations include a too-cozy relationship with a hedge fund and padding of his personal expenses. In fact, the whole affair is so juicy that it has attracted the official attention of the state's Attorney-General. That would be Richard Blumenthal who, coincidentally, is hoping to become Connecticut's next U.S. Senator this fall.

When I discussed the matter with one veteran university CIO, he pointed out that endowments often don't have sufficiently detailed policies or written employment contracts covering these matters. And he noted that too-rapid turnover of investment committee members can cause additional conflict and disagreement about how potential conflicts-of-interest should be treated.

Pension funds and endowments usually have a written investment policy covering strategy and asset allocation. But there should also be a separate operating policy specifically including such issues as disclosure rules, fiduciary responsibility, conflict of interest, and expense reimbursement.

Written policies don't enforce themselves, of course, and they are no substitute for management oversight. The Wesleyan situation should be a wake-up call for any institution which may have skimped in this area.

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Three Keys to Better Hedge Fund Performance:

For all money managers, consistency is hard. A few geniuses like Warren Buffet maintain their touch over years and decades, but most don't. Some of the impediments are well known and widely discussed: Investment is notoriously hard to scale, with big pots much harder to manage than small ones. And, brilliant, original strategies lose their potency when they are widely copycatted. Or, we find that a strategy works in one season, in one kind of market, but not in another.

But there are other problems less often mentioned, that have more to do with the art of management than with the art of investing. Here are three of them:

First: Lack of management experience.

A hedge fund isn't just a strategy; it's also a small business, and it has to be managed. Most are run by very bright, very competitive, often very wealthy individuals with little to no management experience. On top of that, many come from academia and technical areas where social skills weren't a high priority. But as companies grow, they all need management experience in leadership, mentoring, and execution. Some owner/founders learn to recognize their limitations and bring in people with management skills to complement their own trading-and-strategizing smarts. In the long run, they win; and the others don't.

Second: Not-invented-here syndrome.

Nobody invents the wheel more than once or twice in their lifetime, so most good new ideas will come from outside a company's four walls. There are only two transmission belts: people can re-tool old approaches and learn new ones -- which is hard. Or, firms can regularly interview new blood and bring in as many new hires as they can absorb, bringing new approaches and fresh ideas with them -- which is less hard.

Third: Sclerosis in the firm's strategy and structure.

The Greek philosopher Heraclitus argued that change is the only reality. "No man ever steps in the same river twice, for it's not the same river and he's not the same man." Organizations should critically review their strategies and operations on a regular basis, whether it's "needed" or not. How is the money really being made? What are the drivers? Are there too many people in the firm, or involved in the decision process? Too few? The wrong ones?

A once-in-a-generation downturn like the one we've just seen is also the best chance investment firms will have for years to hire incredible talent at credible prices. Recognizing this is a critical step in sustaining performance.

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Better Process, Better Performance:

Elena Ambrosiadou, founder and long-time CEO of London based IKOS, a quant fund managing $1.4 billion, gave a video interview to Opalesque Online that's worth ten minutes of your time. She comes from a technical, "non-people" background of the kind I referenced above but, in a very interesting way, she's turned that experience into an effective management philosophy. In the chemical industry she ran production processes; now she applies that same kind of continuous process refinement, to running a multi-strategy hedge fund and turns it into a competitive edge. It's one way to accomplish the constant adaptation to change that a Heraclitean world requires.

The link is here: http://www.opalesque.tv/videos/Elena_Ambrosiadou

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One-Stop Shops: Start your Engines:

Carolyn McLaurin, head of SEI's endowment and foundation practice, mentioned to me the other day that she is seeing a sharp increase in requests for "total outsourcing" proposals from the pension and investment community.

She said: "The RFPs used to ask for consulting help on a specific piece of the portfolio, but it was clear that the foundation would run the overall strategy. Now, the RFPs are often specifically asking for a turnkey solution, with investment discretion in the hands of SEI." They are especially seeing more such inquiries from nonprofit health systems.

Two camps are emerging. The big endowments and pension funds are bringing more investment management in-house to maintain control after the shocks of last year, while smaller colleges, foundations, and pension funds are finding the investment work overwhelming and are looking for a total solution.

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What We Say Versus What We Do:

Peter Lynch, the legendary chief of Fidelity's Magellan Fund in its glory days, used to make a lot of media appearances. He once said that when he reviewed what he had said on some talk show, he was often amazed to see that his carefully articulated public views would not have led to his actual investment moves. He concluded that investment professionals make money because of their discipline and experience, and often rationalize what they've done after the fact.

I was reminded of this while reading a report from the Citigroup global markets group. Their January polling data suggests that investors are oscillating between investment caution and an optimistic view of the future. As the Citi survey notes, " with an approximately 10% total return for stocks being anticipated, it is unclear why the average cash position has climbed as a percent of the portfolio from the October readings." As with Mr. Lynch, the public pronouncements investors are making don't seem to square with how they're actually investing.

But, it does tell me that for money managers -- including hedge funds -- with a good strategy and story, there is still a lot of cash waiting out there. How does that old Gershwin tune go? "Nice work if you can get it, and you can get it if you try."

The survey also points out that Asian Emerging Markets sentiments seems to be holding up nicely and we intend to focus in future newsletters on India and China, since they offer such fascinatingly contrasting views of governments and economic systems, two very different " roads to riches" stories.


Charles A. Skorina & Company
Executive Search Consulting
415-391-3431

History:
JPMorganChase - Credit and risk management
Ernst & Young - Systems and process consulting
US Army - Russian Linguist, Japan
University of Chicago, MBA, Finance
Michigan State University and MIIS/Middlebury College
Culver Military Academy
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The Skorina Letter No. 7

People and issues at Endowments, Foundations, Hedge Funds and Alternative Investments

December 16, 2009

In this issue:

• Dartmouth pulls the plug
• Pension funds search and shuffle
• More funds for hedge funds

Dartmouth announced the other day that their search for a chief investment officer to replace outgoing CIO David Russ has been suspended. Since this is such an extraordinarily good time to find investment talent, the problem can't be lack of candidates.

Dartmouth spokesman Steve Kadish has announced that they will try letting the board investment committee directly oversee the investment office for at least a year. He said it would be "a healthy moment of learning." The investment committee chair is hedge fund star Stephen Mandel, Jr (Dartmouth '78), founder of Lone Pine Capital, whom Kadish described as "one of the best investors in the U.S."

My opinion wasn't solicited, and Stephen Mandel's record speaks for itself. I will just observe that, in general, an endowment CIO and a hedge fund manager are two different things. Endowments play defense with a long horizon, transparent commitments, and a gaggle of constituents; hedges play offense quarter-by-quarter, with less consultation and more combat. Some good people can adapt to either management style; some can't. We'll see if everyone is still happy a year from
now.

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Endowments back from the abyss:

NACUBO and Commonfund aren't ready to unveil their complete annual endowment survey yet, but they gave us a little something to put under the tree this week, with only two-thirds of the eventual responses in hand. On average, the endowments reported a 19% decline for the entire 2009 fiscal year. Better than the sickening 22% drop they previously found in a special survey covering just the first quarter. This implies what we expected to see: a terrible year that got a little less terrible as it unwound. Even without the detail, it also suggests that the huge and widely-reported losses at the Big Ivies have been partly offset by less-painful drops at the smaller schools. See press release here:

http://www.nacubo.org/Research/News/Preliminary_Results_of_the_2009_NCSE_Released.html

Pertinent to our corner here, John Nelson, a Moody's analyst quoted by the Inside Higher Ed website, opined that the reported average allocation to alternative assets -- 51% -- seemed perplexingly high in the preliminary report. He has predicted that endowments would cut back on these "riskier" assets in pursuit of more liquidity. We'll take another look when all the returns are in.

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Pension funds search and shuffle:

Santa Barbara County's retirement system ($1.6 billion) is looking for their first CIO, while the $5.2 billion Sacramento County system is looking to refill their CIO slot.

The $5.7 billion Oklahoma system just brought in Bradley Tillberg as their new CIO. He's a CFA and University of Nebraska grad with years of experience as a private-sector analyst and portfolio manager. He'll be just the second CIO at OPERS in their 46-year history.

Lawrence Johansen, an actuary and SUNY grad who held several positions in New York State's teacher retirement system, is moving over to New Hampshire as director of investments at the $5 billion state retirement system.

And, in Fairfax County, Virginia; the Educational Employees Supplementary Retirement System ($1.6 billion) has bumped deputy executive director Jeanne M. Carr up to executive director and CIO. Ms. Carr, a CFA and another University of Nebraska (MBA) alum, succeeds her boss, Dr. Alan Belstock.

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Thoughts from clients, colleagues, and passing strangers

More funds for hedge funds:

Just seven months ago the out-flowing tide of hedge fund money finally reversed itself.

All through 2007 and the first half of 2008, investors happily threw money into hedges with both hands, at the rate of ten or twenty billion per month. Then, when the economy ran aground last fall, they sucked it right back out. From October to March, forty billion per month was leaving, as fast as the lockups permitted.

That, and plummeting asset prices, decimated the industry. Bye-bye, Satellite. Sorry to see you go, Raptor. Catch you later, Carlyle Capital and Atticus.

Finally, in the merry month of May, the tide began to trickle back in, and by November was bringing in more than $25 billion per month.

On top of that, fund valuations have been trending upward with the recovering equity markets, enough to restore performance fees for many managers, who are no longer "working for free" (a hedgie trying to live on a mere two-percent is a pitiful thing to behold). As of November month-end, hedge assets were back up to $2 trillion, matching their 2008 peak, according to HedgeFund.net's estimates released just this week.

So is everybody happy in hedge fund land? No, not really.

Them what has, gets. The two hundred or so multi-billion-dollar funds are mostly sitting up and taking nourishment. The many hundreds of smaller funds are still scrambling.

As the head of a big California pension plan said to me last week: "The most pressing question on my mind these days is always just how am I going to make over 8% with acceptable risk in the years ahead?" Some of those start-ups will have answers, if they can get themselves noticed.

The industry continues to consolidate, with the 1500 to 2000 smaller hedge funds fighting for barely a third of the hedge assets. They average not much more than $300 million, with many much smaller. It's a textbook long-tail distribution, and that tail isn't going to get any shorter.

I recently spoke to Bruce Zimmerman, the chief investment officer of UTIMCO at the University of Texas, who pointed me to an item in his 2008 year-end report:

"Our staff held over 1,200 meetings with prospective investment managers in addition to receipt and review of countless other investment proposals. This 'pipeline' of potential investments, resulted in approximately 60 new investments, roughly one-third of which were with private investment managers with whom UTIMCO already had an existing relationship."

So, here is one of the biggest endowments in the country ($18 billion) screening thousands of proposals, meeting 5 or 6 of them every working day, and they hire just 40 new managers! Then subtract the private equity guys, the VCs, the hard assets, and how many went to hedges? A dozen? Maybe twenty?

How does a hedge manager get noticed in a mob scene like that?

I called Michael Litt this week. He's a University of Chicago MBA, former partner at FrontPoint Partners, and the founder of a brand-new global opportunistic fund called ArrowHawk Capital, with over $500 million in commitments. I believe that makes him the biggest hedge fund launch of the year.

Michael happened to be on a Swiss train bound for meetings in Geneva when he took my call, and he reflected on his launch efforts as the Alps flashed by.

He said he knew that even his successful track record at FrontPoint (which he eventually sold to Morgan Stanley) wouldn't get him more than a few extra minutes to pitch to pensions and endowment heads. So he spent a year just patiently going around and asking them what they wanted and needed.

Here's what he heard: Institutional investors want real businessmen with real management experience, a strategy that makes sense, an infrastructure that will accommodate growth, transparency, a cap on fund expenses, a hurdle rate, no gate in the legal documents, no short money co-mingled with long money (they did not want fund of funds pulling out money on a whim and ruining strategies or positions), rock-solid risk systems and controls. Oh, and better pricing. Much better pricing.

So that's what he gave them. Along with a global, multi-strategy offering run with a deep- talented bench. And did I mention that he is constantly on the road (or the rails) talking to investors and prospects? You can call it marketing or just good communications, but he is at it every day, relentlessly.

There really is hope for start-ups and smaller funds. Family offices can make quick decisions if you fit their needs. Seeder funds such as Protégé Partners, FRM, and SkyBridge still have money. And emerging manager fund of funds are still in the running for allocations from the big pension and endowment funds.

I spoke with the CIO of an endowment with almost a billion in assets whose name I would like to drop, but can't. He told me flatly that he has -- and will continue to -- invest in HFs as small as 40 or 50 million. He has no problem at all putting 5 million into up-and-comers or being as much as 20% of the fund in the beginning. This isn't benevolence; it's foresight. He looks at this as a way to get an edge in a growth opportunity.

Apparently, he's not alone. Pensions & Investments just reported a survey by the Spectrem Group of 81 U.S. endowments and foundations, noting that: "Among endowments and foundations with $25 million to $49 million in assets, 36% plan to focus on alternative investments. Of those with $50 to $199 million, 10% plan to focus on alternatives, and 29% of funds with more than $200 million cited alternatives as an area of focus." See press release here:

http://www.pionline.com/article/20091209/DAILYREG/912099978

This study is not dramatically different from last year's Preqin study "The Growing Appetite of Institutional Investors for Emerging Manager Hedge Funds."

They wrote: "with growing experience institutional investors are now choosing to invest in younger funds, imposing fewer restrictions in terms of assets under management and track record requirements." See Preqin research news here:

http://www.preqin.com/listResearch.aspx

This is essentially what my billion-dollar-endowment-manager said above, but with lots of charts and graphs.

And, regarding size, one of those charts said that only a third of the institutions insisted on a minimum $1 billion AUM. More than half would consider, on their merits, funds under $500 million. More than a quarter would look at applicants with less than $100 million. Eleven percent said they had no rigid size minimum at all.

We did our own internal study, looking just at the endowment space. Among the one hundred biggest U.S. endowments -- from Harvard down to University of Louisville -- we found the hedge-fund rosters for 41 of them. Of the 116 funds selling to those schools, 18 (about 16%) had less than $1 billion AUM. Eleven (almost 10%) were under $500 million. Only eight of them (7%) ran $100 million or less. That's a less sunny picture than Prequin paints, but we looked at a narrower group, and besides, nobody said it was going to be easy. [for a copy, send request to skorina@sbcglobal.net]

The head of one major consultant to institutional investors told me last week that they are currently making three times the number of new-business and current-business renewal pitches he saw in prior years. He says that with all the consultant changes on the horizon for next year, investment manager changes will inevitably soon follow.

So, if you're a baby hedge fund, now is the time to meet your friendly neighborhood consultant. There are probably 50 to 75 firms with a reasonably-sized client base, so don't be shy.

Kevin Quirk, of CaseyQuirk, the widely used management consultants to investment management firms, told me that seed platforms have been busy this year, funding startup hedge funds. But, unlike a few years ago, they now tend to have seasoned professionals with solid infrastructure, and clearly articulated strategies.

And those fund of funds we spoke harshly about above? Well, hot money is better than no money at all, and they have their uses, too. A pickup from a good FoF can sometimes give credibility to a startup who isn't getting through any other doors. Our internal study says that 14% of the hedges selling to those major endowments are fund of funds. That's probably a couple of hundred smaller funds selling, indirectly, to endowments they couldn't reach directly.

There are channels to carry your message. But you'd better have one that's worth carrying and you'd better get it out there tirelessly.

A lot of hedgies are more comfortable running spreadsheets than going out and talking -- and listening -- to people. They will not survive.

It doesn't matter how brilliant your professors thought you were, how much money you raised back then, or how good your numbers are. If no one hears about it, you're not in the game.

The Skorina Letter No. 6

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

Doing Good...and Doing Well:

The world's largest private foundation, the Gates Foundation in Seattle, is paying its new CEO nearly $1 million per year. Jeffrey Raikes was an early Microsoft employee who rose to the number three job in the company and, according to Forbes, was personally worth $490 million as of 2003. (He's also a co-owner of the Seattle Mariners -- another largely philanthropic endeavor). His predecessor at the foundation, Patricia Stonesifer had taken just a dollar a year during her ten-year tenure.

Mr Raikes led the list among foundation CEO salaries reported by the Chronicle of Philanthropy last month.

The second-highest paycheck went to Joan E. Spero, former head of the Doris Duke Charitable Foundation, who made $770 thousand in 2008. The median pay for private-foundation CEOs was about $460 thousand last year.

Among the community foundation heads, Lorie Slutsky at the New York Community Trust headed the list with $630 thousand.

The survey also noted that foundation chief investment officers often made more than their bosses (which is also the case among the biggest college endowments). Laurance R. Hoagland, CIO at the William and Flora Hewlett Foundation, for instance, made $1,619,904, including his $1 million bonus.

As in the crass for-profit sector, however, the goodies don't necessarily trickle down to the worker-bees. Back in June, the Chronicle noted that some large private and community foundations were sharply cutting staff. The Robert Wood Johnson Foundation offered buyouts to 43 percent of its 250 employees. The Ford Foundation offered a buyout to 140 of its 550 staff members. And The California Foundation in L.A. cut 44 jobs.

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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:


Have The "Emerging" Markets Finally Emerged?

At the "Eye on Endowments and Focus on Foundations” conference in Boston last month, two prominent CIOs, Don Lindsey of George Washington University and Larry Kochard of Georgetown University, emphasized the need for institutional investors to look outside the US for robust long-term growth.

"The structural changes taking place [in the market] mean that we as investors will need to spend a significant amount of time outside of the United States, not just on the ground, but also as a way to understand the political and social implications of what's happening abroad," said Lindsey.

Kochard said, "when I look at the United States and compare it to where we were in 1980, it really is a mirror image of where we are today. [Now] it's an environment where there's probably going to be more demand for hard assets, relative to financial assets... But unlike the 1980s, when the U.S. was really the only game in town, today much of the world is a market-based economy."

Two of my favorite long-time investors in global markets are Chuck Johnson of Tano Capital and Lou Morrell, the recently “retired” head of the Wake Forest Endowment. I spoke to both of them recently about international and emerging-markets opportunities and how institutional investors should be looking at them.

Chuck has been immersed in global markets since the early 90s, when he spearheaded the merger of the Franklin and Templeton mutual fund groups. As co-President of the merged Franklin Templeton, he opened new offices in 20 countries and, with prescient timing, set up the Franklin Templeton India Mutual Fund Company in 1995. It's now one of the top three domestic mutual fund firms in India.

Lou Morrell was the Wake Forest University CIO from 1995 to 2009. Now, in his new more-active-than-ever "retired" position, he manages about one-quarter of the school’s endowment on an outsourced basis, as well as funds from other individuals and institutions. Lou's performance at Wake Forest put him in the top tier of investment managers, earning his school the Savviest Nonprofit of the Year award from Foundation and Endowment Money Management magazine in 2006.

Chuck just returned from his latest five week swing through Asia and, although he is in the midst of raising money for his latest India fund, took time to sit down with me and discuss what he sees as the key drivers in the Asian economies.

He says that three factors are paramount in India, China, and Southeast Asia: “First, they are decoupling from the economies of the U.S. and Europe, and they will be able to grow even while we are in the doldrums. Second, their economies are more soundly financed, without our overhanging debt problems. And, most importantly, their demographics and liberalized economies guarantee that tens of millions of young people are going to be climbing into the new middle classes and powering big domestic consumer growth for decades to come."

Chuck says these trends mean that China will likely overtake the US as the world’s largest economy in 20 years and India will overtake the US within 40 years. He is investing in opportunities across the public and private equity spectrum and sees superior returns for years to come.

Lou, in his November “Capital Market Update” writes that the “outstanding investment opportunities are available primarily outside of the U.S.” He states that the US “economy is weak, the unemployment rate is growing, the U.S. dollar continues to fall relative to other currencies, the federal budget deficit is growing, and at some point, unless interest rates are raised, inflation will appear. To make things more difficult, tax increases are planned that will reduce funds available for investment as the US shifts away from private enterprise to government control." And finally, “businesses are reluctant to hire because of uncertainty with tax increases and higher healthcare costs on the horizon.”

When I told Lou that, as an American, I found this forecast pretty depressing, he replied: “Just the opposite, Charles; it's a great opportunity for investing on a global basis. The falling dollar is great for U.S. exporters. There are also new opportunities in healthcare - especially bio-tech, both in the U.S. and internationally. Gold up again this morning - great opportunities in energy. Bets against the dollar also offer big returns. It all looks good!”

These gentlemen are looking into the future, as all investors must. And a quick glance at the recent past seems to confirm what they’re saying.

Take a couple of index-tracking ETFs: one for emerging markets (iShares EEM), and one for U.S. domestic stocks (Vanguard's VTI). Emergers over five years returned 17.1% per year while the Russell 5000 (tracked by VTI), gave you just 1.9%. Of course, the rap against emerging markets has always been their volatility and, indeed, they were about twice as volatile as U.S. stocks in recent years. Further back, we all remember the crises in Mexico (1994), Southeast Asia (1997), and Russia (1998).

But, Marko Dimitijevic, who runs the $2 billion Everest Capital Emerging Markets Fund (up 65% so far this year), recently pointed out in Barron's that the term "emerging markets" is rapidly obsolescing. These markets, he says, have become much bigger, more liquid and less volatile than many investors in the West realize. He points out that nearly one-third of the world-equity market cap is now represented by emerging markets.

Just look at the Sharpe ratios to get a sense of their risk-adjusted returns: You got a handsome 0.58 Sharpe for the emergers, and a dismal -0.04 for U.S. stocks. On a risk-adjusted basis you would have gotten a better return holding T-bills for five years than the Russell 5000!

Endowment managers have typically been putting only about 5% to 8% of their portfolios into emerging markets equities in recent years and, as these holdings fatten up, I presume they will tend to follow their long-term gameplan and re-balance back down. I focus on finding the talent, of course, not asset allocations and investment bets, but I have to wonder whether those targets shouldn't be trending up as we look at the prospects for the next decade.

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

The Skorina Letter No. 5

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

Wesleyan Looks at Outsourcing:

Another shoe drops at Wesleyan University (the one in Connecticut -- not to be confused with all those other Wesleyans) regarding the quiet departure of chief investment officer Thomas Kannam last month.

The campus paper reported just last week that replacing him may take several months. Or he may not be replaced at all. President Roth noted that some endowments use "outside organizations" instead of hiring a CIO, and that they are reviewing all options.

So, Wesleyan adds to the ranks of those considering outsourced management.

Scott Wise Carries On:

In October, Rice University officially moved its endowment over to the new Rice Management Company. Scott Wise, previously VP-Investments and Treasurer of the university, will serve as president of RMC.

I spoke to Scott down in Houston recently, and he's pleased with his new role. He's glad to give up some of the administrative headaches he had as treasurer to focus full time on getting the best possible returns on the endowment. He says, "The more you focus, the better you perform."

Scott was just 39 when he took over Rice's $900 million endowment twenty years ago. By 2006, he'd grown it to $4 billion -- an average compound return of 13 percent over 17 years.

Institutional Investor magazine recognized his achievement that year, naming him one of four finalists for their Endowment of the Year award. He's a Rice alumnus, with a BA in economics and a Masters in accounting from University of Texas.

For the fiscal year just ended, the Rice endowment was down 17%, still well ahead of Stanford, Harvard and most of the other mega-endowments. And I have no doubt that the Rice nest-egg will bounce back big-time as it benefits from Scott's now-undivided attention.

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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:

Risky Business:

What you need to do about risk depends on what you think it is.

“Gravity” once just meant the “heaviness” of something. When Newton got through with it, it was an invisible force understood only by mathematicians.

Investment risk is a little like that. Except, Newtonian gravity can actually predict precisely how the future will unfold. Math-modeled risk indicators, not so much.

Still, we soldier on, trying to corral uncertainty and turn it into measurable risk. And, as portfolios become more complex, a niche has opened for someone who can stand apart from front-line management and judge the whole picture using the best available techniques, both quantitative and qualitative. Hence, the rise of the Chief Risk Officer.

Among major financial companies before 2007, only Bank of America had a designated CRO.

Over the following year, Citigroup, Merrill Lynch, J.P. Morgan Chase and Morgan Stanley announced chief risk officer appointments. And most major hedge funds have acquired CROs or CRO-like people.

Highly-paid risk officers and risk committees proliferate, but do they help when they're really needed?

The exploding landmines at the center of the 2008 meltdown were the quasi-governmental mortgage-buyers Fannie Mae and Freddie Mac.

Fannie hired Enrico Dallavecchia as CRO in 2006. Shortly thereafter he told his bosses that Fannie had one of the weakest control processes he'd ever seen, but that nobody seemed to care. His budget was cut by 16% in 2008, and he soon left the company.

Freddie Mac had a CRO named David Andrukonis, who told his boss way back in 2004 that the company was buying bad loans that "would likely pose an enormous financial and reputational risk to the company and the country." His boss responded that they couldn't afford to say no to anyone and Freddie continued to buy riskier and riskier loans with the approval of its Congressional patrons. Mr. Andrukonis left the risk management business in 2005 and became a teacher.

These people could all do the math. But what good are the impeccable calculations if no one wants to understand them?

An officer reporting to Robert Lewis, SVP and Chief Risk Officer at AIG, reportedly blessed nearly every credit-default swap that later exploded in their faces. Mr. Lewis, who was CRO before and during these monumental miscalculations, is still aboard.

Bear Stearns, which was carrying a book of derivatives leveraged at 36-to-1 when it collapsed, employed a chief risk officer named Michael Alix. When the dust cleared, Mr. Alix was hired as a senior vice president at the New York Fed. As a banking supervisor.

Harvard (of course!), has a CRO, or had. Daniel Kelly was the long-time CRO at Harvard Management Company until he was lured away last month. Now, he's chief risk officer of alternatives for UBP Asset Management, the hedge fund-of-funds arm of Union Bancaire Privee of Geneva, a hire they made as loudly as possible, after losing $700 million of their investor’s funds placed with Bernard Madoff.

The endowment at my own school, University of Chicago, is now looking for its first CRO, and I had a chance to chat with their new chief investment officer, Mark Schmid about the challenge.
He emphasized that the CRO would have to be a state-of-the art risk analyst, but would also have to understand qualitative factors, and be able to knit them together. And, it's not just a defensive, policing function. The CRO should also be able to play offense, thinking opportunistically about asset classes, relative valuations, investment themes, and hedging opportunities.

This is a tough search given the broad skill-set that's required and competition from hedge funds and investment banks.

And, even with the best talent available, understanding and controlling risk is still as much art as science.

Russell Read, the former CIO of Calpers from 2006 – 2008 (and another University of Chicago alum), points out that at Calpers they "used what we believed were the finest resources available including some terrific external vendor packages [to manage risk]”…Unfortunately that didn’t lead to us being able to assess properly all the liquidity limits that we faced”.

For all but the largest institutional funds, a CRO hire is as unlikely as getting a private chef for the snack room.

One other option, as Russell mentioned, is to buy some outside risk-analytics help.
Companies like RiskMetrics, which was spun out of JP Morgan in the mid-90s, or Investor Analytics, peddle the VAR (Value At Risk) methodology that has become a standard investment tool. Hundreds of big banks and hedge funds buy their wares, but they haven't had much luck breaking into the foundations and endowments world because of their user-unfriendliness. And the major advisory firms like Cambridge Associates and Wilshire Associates don't provide any equivalent kind of sophisticated risk advice to nonprofit investment committees.

I recently had an interesting conversation with Bill Ferrell of Ferrell Capital Management (and a distinguished fellow-alumnus of Culver Military Academy!) who has some thoughts along these lines.

Bill is a capital markets vet who has a longstanding interest in risk management. He's now launching an advisory service which keeps the math behind the curtain and offers a user-friendly dashboard. With it, a CIO or investment committee may test what-if scenarios and get a broad, actionable look at where they stand versus predetermined risk limits. If risk exceeds their target, Bill’s firm will hedge out the excess risk. In a nutshell, “Managing” the portfolio risks is about controlling the downside and allocating to the best sources of risk-adjusted returns”

For more detail see Bill Ferrell “Pension & Investments” May 4, 2009. Link:
http://www.ferrellcapital.com/pdfs/P&I%20Transparency%20Editorial%2004MAY2009.pdf

Bill has been successful in marketing to banks, and he tells me he's now seeing increasing interest from the foundation and endowment world.

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

The Skorina Letter No. 4

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

Another Very Quiet Departure:

Chief Investment Officer Thomas Kannam has left Connecticut's Wesleyan University for parts unknown. The school's president announced that he had left to "pursue other activities.“ Kannam, a Dartmouth MBA, had been with the endowment since 1998, but was only promoted to full-fledged CIO a couple of years ago.

In recent decades, Wesleyan's endowment has underperformed little Ivy peers like Amherst and Williams. But their troubles go back before Kannam's tenure. The school seems to have adopted a conservative, bond-heavy strategy at the end of the 70s and missed the big stock run-up that followed. Also, it has taken a bigger annual bite of the endowment for operating expenses than most schools – over 7% until recently – and maxed out its borrowing with $200 million in 35-year bonds now outstanding. The fund lost 19 percent over five fiscal quarters as of a year ago, down $715 million to $580 million. Late last year they had to suspend a major construction project and cut back on routine maintenance to balance the budget.

In any case, they now have a chance to reset the endowment under new leadership.

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On The Road Again:

I'm often impressed – or appalled – at the grueling travel schedule many of my hedge fund and private equity clients commit to. I understand that they have to get up close to both their investors and their portfolio companies to stay in the game, but the mileage they rack up requires real stamina.

Wanda Dorosz, CEO of Toronto-based Quorum Funding, invests in the oil and gas technologies sector. She alternates her usual UK, Oslo, Abu Dhabi, Dubai and Bahrain run with her other regular orbit: Toronto-Calgary-Red Deer-Houston-LA.

Chuck Johnson of Tano Capital, meanwhile, is currently monitoring his fund’s investments with his quarterly five-week swing through Singapore, India, Singapore again, HK, a handful of Chinese mainland cities, New York, and home.

And, Doug Metcalf and Bill Lawton of Seagate Global, are digging for private equity investments in China and the Philippines on their usual two to three month journeys to China and Southeast Asia, hitting places I can't even find on the map.

Business out in Asia and the Middle East is looking very good, from what thy tell me. But with the Euro hitting a buck fifty and China slowing down to a "mere" 8% growth rate, it's hard not to get a bit depressed about our prospects here at home.

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Harvard University operates on a bigger scale and in a brighter spotlight than most, but one fundamental problem extends all the way down the food-chain: paying top investment talent what they could make elsewhere. There is always going to be some cultural strain at mission-oriented non-profits, and finding an acceptable balance is never easy.

Bloomberg reporter Gillian Wee has gotten a peek under the skirts of the Harvard Management Company and told all, revealing which outside managers hit their targets, which didn't, and by how much. The numbers, just coincidentally, align with the CIO's push to bring more money in-house, which could re-ignite a whole cycle of controversy at Cambridge as Wall Street-size salaries collide with Harvard-size egos and egalitarian politics.

Most of the endowment (about two-thirds) is currently invested with 63 outside managers. Now, "internal data" mysteriously acquired by Bloomberg shows that only 25 of them hit their targets (and only nine, or 14%, of those actually made any money).

That leaves thirty-eight funds – 60% of them – who not only lost money, but failed to even hit their benchmark targets.

Given that Harvard lost 27% of its endowment last year – the worst performance in the Ivy League – it's not surprising that most of its managers lost money. But this report names names and provides details that are rarely available to sleuths and cynics like us.

There's Jon Lavine (Harvard MBA), who runs Sankaty Advisors under the Bain Capital umbrella. Sankaty's high-yield bond strategy lost 65% of the $383 million it ran for Harvard and trailed its benchmark by a dismal 61 points.

And sharing the doghouse is Dinakar Singh's TPG-Axon long-short fund, which lost $47 million of Harvard's money, 16 points behind its benchmark.

Seth Klarman (Harvard MBA, and a B-school lecturer), beat his target by a respectable 6 points, but that wasn't nearly good enough in a bad year. He still lost $400 million of Harvard's original $2.5 billion stake in his Baupost Group.

There are a few heroes, too. Ed Lampert at ESL Investments in Connecticut turned Harvard's $118 million into $134 million, beating his benchmark by 39 points. And John Grayken's (Harvard MBA '82) Lone Star VI Fund in Dallas, targeting distressed debt in the residential mortgage space, returned 7.5% to his alma mater, topping their target by 21 points.

More details here:

http://www.bloombergmarkets.org/apps/news?pid=20601109&sid=akEKjenRO24Q

Some of these gentlemen will be invited back next semester; some probably won't be getting the thick envelope.

The larger point: Where does this leave the current version of the Harvard investment model? According to Bloomberg, Ms. Mendillo, the endowment CIO, is "reducing the influence of independent firms." But then they carefully note that she “declined to comment on Harvard’s external fund managers or her plans to shift more money in-house.”

Mmmm.

It’s important to note however, that in the decade ending this June – even including the awful recent year – the Harvard endowment earned an average of 14% annually, according to Mebane Faber at Cambria Investments. Respectable returns by any standard.

Yet the last time Harvard emphasized internal management, under Jack Meyer (CIO from 1990 to 2005), his impressive money-making machine was blown up by some of its angry beneficiaries. Meyer paid his people based on performance and in 2004 the top performers got over $100 million in total. A lot of money, but a trifle compared to the tens of billions that the endowment was earning in those fat years.

But some 60s-era alumni thought these salaries were unseemly. A great, Harvard-style dust-up arose. So, Jack Meyer along with thirty of his best and brightest, in an "Atlas Shrugged" moment, left Harvard to found Convexity Capital Management.

With exquisite irony, Harvard is now paying Jack Meyer much more to manage much less of its money.

There's never been any love lost between the B-school types and the "real" Harvard across the river. If the activist alumni didn't want to pay in-house managers what they were worth even five years ago when returns were high, how much will they stand for when returns are more modest and Harvard is freezing salaries for the poets and post-structuralists who stay on the right side of the Charles?

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Don't forget the Connecticut Hedge Fund Association's Global Alpha Forum:

It's on November 5th at the Hyatt Regency in Greenwich, CT.

John Thain, 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.

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.

=====================================

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.