By Anastasia Donde
When Cadogan Management executives planned to walk after their failed buyout attempt last October, one of the firm's investors, the Alaska Retirement Management Board, got wind of the potential changes and took a hard look. Alaska's $14 billion defined benefit pension plan had not been considering cutting any of the managers on its roster. But after a review, the pension plan ultimately decided to drop Cadogan, a fund of funds, on the grounds that the manager had underperformed.
Alaska says the move was part of a broader shake-up of its manager roster. Around the same time it started to reevaluate its investment in Cadogan, the retirement system hired two new funds of funds—the big London firm GAM and the well-known New York shop Prisma Capital Partners—to complement its existing stable of managers, which at the time comprised Crestline Investors, Mariner Partners and Cadogan. The pension plan is now unwinding its $110 million investment in Cadogan and is planning to reallocate the money to GAM and Prisma, which initially received allocations of $75 million and $50 million, respectively. Those two firms will eventually manage more than $100 million each for the pension. Alaska's funds of funds typically manage $100 million to $200 million each.
"Cadogan is a high-quality organization, and it is hard to tell if the ownership changes were a distraction," says Zachary Hanna, the state investment officer who oversees the pension's alternative investments. While most funds of funds did poorly in 2008, many made up those losses in 2009, but Cadogan didn't recover as well as the others, Hanna explains.
The management fracas at Cadogan dates to 2006, when Fortis Bank purchased a 70% stake. When BNP Paribas agreed to acquire Fortis in April 2009, the Cadogan executives started looking for an out. BNP had its own fund of funds, and they knew that keeping Cadogan in the lineup would have created internal competition, which the Cadogan executives wanted to avoid. By the time the executives—including Stuart Leaf, Paul Isaac, Michael Waldron, Richard Collier and Joel Gantcher—reached a deal to spin out the firm, Alaska had already made up its mind.
Leaf, the executive chairman at Cadogan, believes the decision to terminate Cadogan could possibly have been avoided if the organizational changes hadn't triggered Alaska to worry about the firm, which Hanna concedes is true. Alaska had hired GAM and Prisma with the intention of keeping all five managers on its existing funds-of-funds roster. The retirement system has a 5% target allocation to hedge funds and had 4% invested at the time, so it was trying to reach the 5% goal. Alaska has no more plans to hire additional fund-of-funds managers after liquidating its investment in Cadogan, a process Hanna says will take about a year.
The management changes—which didn't, after all, take place—"triggered something that might not have happened in the same time frame," Leaf says of the termination. He says Cadogan likes to keep in touch with both current and former investors, and hopes to continue working with Alaska in some way. "We enjoy the relationship we had with Alaska," he says.
According to Cadogan's performance reports to clients, the Cadogan Alternative Strategies Trust, its flagship fund, gained 3.97% for 2009, compared with the InvestHedge composite fund of funds gain of 9.21%. Alaska's fund-of-funds investments are all set up as separate accounts, and both Hanna and Leaf agree that Cadogan's portfolio for Alaska has done slightly worse than the firm's main fund, in part because some elements of the fund's investment strategy were customized for Alaska.
Leaf says the customized portfolio excluded a couple of managers whom he describes as "key contributors" to performance, though he declines to say which funds were left out. "Their main commingled fund historically, on an annual basis, had better performance than our account," acknowledges Hanna. That fund had more exposure to volatile long/short strategies than Alaska's account, for example, and these strategies contributed high performance in some cases, Hanna says. Alaska tends to look for less volatile absolute return strategies and views its hedge fund portfolio as a substitute for fixed income rather than equity. Hanna declines to comment on individual manager performance, but the total hedge fund portfolio, including Cadogan, gained 9.5% in 2009. Alaska benchmarks its hedge fund portfolio to Treasury bills plus 5%, which for 2009 returned 5.2%.
Leaf and the other executives reached an agreement to spin out and buy back their 100% stake in the firm from Fortis and BNP at the end of last October. Cadogan is now completely independent and has broad employee share ownership, Leaf says. The firm manages about $3.6 billion on behalf of institutions and wealthy individuals. He says Cadogan has lost few mandates, a claim seemingly borne out by the fact that other known pension fund clients are staying on, and consultants say they have not seen an exodus away from the manager. In the end, Leaf says that though the turn of events with Fortis may have cost the firm a client, it was ultimately the best outcome for the business. "We are thrilled to be independent and to focus 100% of our attention on the business again," Leaf says.
Meanwhile, GAM and Prisma, having been hired at an opportune time, now stand to gain from Cadogan's termination. Hanna says the pension chose those managers because they were good complements to Alaska's existing funds of funds. Both are set up as separate accounts, so Alaska's investment staff can still monitor the funds' weightings to particular strategies. GAM increased the weightings to its global macro and trading strategy funds, at about 60%, for Alaska.
Prisma is running a low-volatility diversified strategy for Alaska. The pension's investment staff and its consultant, Callan Associates, talked to other fund-of-funds managers for the mandate, including Permal Group and K2 Advisors. Hanna says all four are quality organizations, but GAM offered a solid track record as well as exposure to strategies the fund has little exposure to. Prisma offered good diversification and low correlation to the fund's incumbent hedge fund managers, he adds.
"The Alaska staff has had a holistic approach in terms of how they cover their hedge fund strategies," says Joe Gieger, managing director at GAM. He adds that the Alaska fund used GAM to fill in the blanks left by its existing strategy exposure. "They did a lot of work to be sure that they didn't have the same manager names, so there is little or no overlap."
Alaska wanted higher exposure to global macro and trading strategies because they offer significant downside protection, Gieger says. In a typical GAM fund of funds, low-volatility arbitrage managers make up about 30% to 55% of the portfolio, while equity long/short managers comprise 20% to 45%, and trading and global macro managers comprise 15% to 40%. At Alaska, the latter type makes up about 60% of the portfolio.
Gieger says most clients that have significant accounts with GAM are asking for more exposure to global macro and trading strategies. Toward the end of the year, Alaska stands to have even more exposure to these strategies, as some of the Cadogan money will be doled out to GAM.