Recently, a woman ate her fiancé’s last ice cream bar in Orillia, Ontario. When she returned to the convenience store to replace it, she picked up a Lotto Max ticket and went on to become a multimillionaire.
George Luste, former president of the University of Toronto Faculty Association, describes success with hedge funds as likely as “winning the lotto.”
For him, the University of Toronto Asset Management Corporation (UTAM), a wholly owned subsidiary that actively manages the university’s pension funds, endowment, and other short- and long-term investments, is taking a risky bet by putting their faith in hedge funds.
Previously, the university’s investments were passively managed by the university’s treasury department and supervised by a volunteer committee.
The University of Toronto’s latest annual financial statement points out that UTAM has around $255.8 million invested in or through hedge funds, mainly in government and corporate bonds and emerging markets equities.
Hedge funds — investment vehicles that pool capital from a number of investors — bet on and against bonds, securities, and other investment instruments, but are extremely complex.
“Hedge funds cannot guarantee returns and are like buying a lotto ticket and hoping to win. But someone loses money always, and, really, how many winners do we have? In such investments, the only people that make money are the managers,” said Luste.
Luste is not the only one who feels that way.
The California Public Employees’ Retirement System (CALPERS) recently decided to divest the $4 billion that it has invested in hedge funds. Ted Eliopoulos, interim chief investment officer of CALPERS, said the decision to eliminate 24 hedge funds and six hedge fund-of-funds wasn’t related to investment performance.
According to CALPERS figures, CALPERS paid $135 million in fees in the fiscal year ended June 30 for hedge fund investments that earned a 7.1 per cent return, contributing 0.4 per cent to its total return.
“Hedge funds are very volatile and don’t have any government regulation since it’s a commercial contract between two parties. But who will hedge against these hedge funds?” said Bharat Singh, a certified financial planner in Toronto.
Still, UTAM is confident of its investment strategy, with the Long-Term Capital Appreciation Pool (LTCAP) posting a net return of 14.6 per cent last year. The LTCAP posted just a one per cent return two years back.
William Moriarty, UTAM president and CEO, said that UTAM managers are taking a strategic call on investments, and hedge funds are one option for them.
“We haven’t made specific allocations for hedge funds, but it depends on manager to manager — they decide on what basis investment is to be done,” Moriarty said.
Moriarty was the fourth-highest paid public servant in Ontario in 2013, earning a salary of $772,547. David Naylor, U of T’s former president, earned $388,401 in 2013.
A comparison of U of T’s endowment plan return with its American counterparts reveals relatively significant differences in returns. For example, the Yale University endowment fund reported a 20.2 per cent investment return for the last fiscal year. Harvard University’s endowment reported a 15.4 per cent gain for fiscal 2014, while the University of Pennsylvania was up 17.5 per cent.
Luste also critcized the university for the fees that it pays to fund managers. UTAM paid out over $14 million in investment-related management fees to external managers in 2014.
Recently, UTAM has also increased its emphasis on investments in emerging markets. According to a recent report to the university’s Business Board, LTCAP invested around 10 per cent of its total funds — over $178 million — in emerging markets last year, but has lost over 1.8 per cent this year.
A recent research paper from the International Monetary Fund points to a slowdown in the emerging markets, saying that the weakness could be a “prelude for more modest growth rates in the years to come.”
A comparison in the research paper notes that economic expansion rates in more than 90 per cent of emerging markets are lower than before the 2008 turmoil. As a group, the emerging markets are growing at just five per cent, compared to about seven per cent before the financial crisis struck in 2008.
Nonetheless, Moriarty is confident of his strategy thus far.
“We are looking at higher returns from the emerging markets and will increase our investment around 10 per cent there,” he said.
