Oregon’s OPERF charts progress in hedge fund overhaul

The $95.4 billion Oregon Investment Council has established anchor relationships in relative value, event-driven, and global-macro strategies as well as expanded the CTA portfolio, equally weighted managers, and continues to conduct due diligence on additional multi-strategy funds. Meanwhile it is also restructuring its public equity allocation following a review of the portfolio and its managers.

Over the last 16 months, $95.4 billion Oregon Public Employees Retirement Fund, OPERF, has approved eight new hedge fund strategies totalling $2.45 billion in commitments in its diversifying strategies portfolio.

Moreover, the team at Oregon Investment Council (OIC) have established anchor relationships in relative value, event-driven, and global-macro strategies; expanded the CTA portfolio to four, equally weighted managers, and continues to conduct due diligence on additional multi-strategy anchors in the $4.6 billion portfolio. Of the new relationships, seven are brand new while one was a conversion of an existing fund investment.

The latest changes are steps on the road to overhauling the portfolio, centred around diversifying managers and strategies to escape a legacy of concentration in the portfolio and overlapping exposures. Today, top 10 hedge fund managers at the fund include names like AQR Capital Management (which has three mandates) Hudson Bay Capital Management and Davidson Kempner Capital Management.

“I think the team has done an amazing job over last couple of years [building the allocation] from seven firms and nine strategies to 22 and 25. That’s a tremendous amount of travel; a tremendous amount of writing of these 350-page documents we use to review all the different details, in addition to their other job in real assets,” said CIO Rex Kim in a recent OIC meeting. He added that building out the portfolio has relied heavily on consultant Albourne, providing support around manager selection and due diligence particularly.

OPERF launched its alternatives portfolio comprising real assets (7.5 per cent of AUM) and diversifying strategies (7.5 per cent of AUM) in 2011. Diversifying strategies returned 16.5 per cent in 2022, outperforming the HFRI FOF Conservative benchmark and a 70/30 Reference Portfolio, led primarily by GAA and CTA legacy exposures.  On the heels of strong 2021 and 2022 performance, the portfolio is now outperforming its benchmark on a three-year basis.

The OIC board heard how the collapse of SVB triggered a negative impact on some hedge fund strategies including short bonds, CTAs and macro. Positively, strategies like long short and relative value have done better.

Other recent trends include investors rebalancing because hedge funds have outperformed, moving assets from hedge funds into private credit.  Still, hedge funds offer attractive opportunities relative to prior years due to higher cash yields. Elsewhere absolute return strategies with a low correlation to equity are providing valuable diversification.

Going forward, the team will continue to increase the number of managers and strategy diversification, including relative value (which has a 26 per cent strategy weight vs a 34 per cent target) and equity long short. Strategy will also continue to focus on rebalancing GAA and CTA managers while researching areas of interest including quantitative equity market neutral strategies and fixed income arbitrage strategies.

Restructuring in public equity

OPERF is also restructuring its public equity allocation following a review of the portfolio’s construction and managers.

The portfolio reset, embarked on over a year ago, seeks to address key issues including bringing the tracking error within range; maintaining and adding core passive exposure to the developed market sleeve, revisiting Oregon’s factor selection in the risk premia portfolios and focusing on alpha generation from high conviction active managers.

The restructure is a response to analysis that revealed that the portfolio’s largest factor exposure was to value, and that it was underweight growth – particularly large growth on a benchmark relative basis. The majority of active risk was coming via style factors, and the tracking error was high at 2 per cent, explained Louise Howard who became senior investment officer for the allocation in January 2022.

Since January, in phase one of the strategy, Oregon has targeted the low hanging fruit in the restructuring process in the form of benchmark misfits, taking down over-weights to smaller-and mid-sized value exposures and re-purposing those assets to more benchmark orientated strategies. The team have also reduced the underweight to large cap growth equity and ensured stock selection becomes a larger contributor to active risk. The tracking error has also come down significantly to 1.2 per cent.

From now until year end the focus will be on adding passive exposure to the international allocation, and further diversifying the factor exposure. From 2024, the focus will be on rebalancing manager exposure to reduce active risk and adding exposure to neutralize existing style biases.

OPERF’s portfolio is divided between public equity (27.5 per cent) diversifying strategies (7.5 per cent) real assets (7.5 per cent) fixed income (25 per cent) private equity (20 per cent) and real estate  (12.5 per cent)