State Street Global Advisors has been appointed by Universities Superannuation Scheme to manage a $200 million hedge fund replication mandate. The portfolio will be managed on a segregated basis by SSgA.
SSgA has worked in conjunction with hedge fund academics Bill Fung and Narayan Naik of the London Business School and David Hsieh of Duke University, as well as the consultant firm JTP Partners, in developing an offering for USS. The Hedge Fund Beta Replication Strategy is aimed at replicating the average performance of a universe of hedge funds through indexing techniques based on Fung, Hsieh and Naik’s analysis of the investment returns of hedge funds.
According to academic analysis, 85% of returns by the average fund of hedge funds can be attributed to a collection of risk premiums of market returns rather than the active management skills of hedge fund managers. These risk premiums include equities, credit, bond market duration and market volatility, all of which SSgA said it can replicate at a significantly lower cost.
“We are convinced of the merits of hedge fund replication as a way of gaining transparent, liquid and low-cost exposure to the risk premia that drive the majority of hedge fund returns,” Michael Powell, head of alternatives at USS. “We see this strategy as a core part of our integrated approach to investing in hedge funds alongside our single manager hedge fund program.”
State Street Global Advisors managed $2 trillion in assets as of the end of December 2007.