Charles Van Vleet, Textron's private pension fund CIO, gives his perspectives on why benchmarking against the HFRI is a mistake in a rising S&P environment in a recent Opalesque TV interview. He also forecasts a great merger between private equity and hedge fund managers, explains why the latter may be better at managing structured debt and what hedge funds can do to facilitate investments by allocators.
The wrong way to use hedge funds
His predecessor took on a 3% allocation in hedge funds and benchmarked it against the HFRI, he says, but he thinks it is the wrong way to use hedge funds. "My observation of hedge funds is that they are increasingly, particularly in the rising S&P environment we've had in the last two or three years, taking on – just like the HFRI in general – more and more equity beta. There are a lot of less expensive ways that I can get equity beta," he comments.
Mr. Van Vleet agrees that the HFRI is a great index, and a "slow rabbit" in which one can pick some select funds. His objective however is not to create a slow rabbit benchmark internally but to "carve out something that truly looks different to rate beta, equity beta, curve currency."
He wants to find hedge funds without the beta characteristics, and benchmark them to LIBOR +200. If he can make a basket of such funds – with various strategies – he will "stack that on top of" his S&P 500. He could never justify, he claims, tying up capital at LIBOR +200 unless he was going to use it as leverage to port it on top of his other bond and equity and other investments. However, other plan sponsors may not think that way, he adds later on, as not all might wish to use leverage in this way. But he thinks it is going to be impossible to get a 7.5% rate of return without leverage. "The objective is to use smart leverage." "I think that's the best way to use hedge funds," he continues. His program is to shift the allocation to L+2 some time this year, although "it's a 12-month project."
Hedge funds better at managing structured debt
Mr. Van Vleet sees a "great collision" between traditional private equity managers and traditional hedge fund managers, as they both bring "tremendous insights and brilliance to investing."
As part of his plan to increase allocation into private debt structures (such as bridge loans, capital expansion loans, asset-back receivables, factoring, lease financings, etc.), he has looked at the likes of KKR, Bain Capital, Carlyle on the private equity side, as well as hedge funds such as Avenue Capital, Anchorage Capital, and Tilden Park that are coming into that space.
Those hedge funds coming into the structured debt space might have been those that inappropriately invested in a three-year liquidity idea, had a 90-day liquidity vehicle, and learned their lesson in 2008, he continues. These funds might still be investing in the three-year liquidity ideas, but they need a three-year liquidity vehicle - so they are looking to build private equity structures. He thinks hedge fund managers will be better at managing structured debt. "There are fantastic opportunities for hedge fund managers who are thoughtful about creating a new vehicle for those type of ideas."
Advice to hedge funds
The first thing that hedge funds could do to help corporate plan sponsors such as his, is to have the right vehicle for the right idea. The second thing they can do is present clean numbers, "an honest assessment of your Greeks," with returns, Sortino, Kurtosis, drawdown, recovering drawdown, hit rate, etc. in a single column spreadsheet, so "I can do my own Greeks."
Indeed, Mr. Van Vleet found that hedge funds in general are not giving a good menu of typical Greek analysis.
In this Institutional Investor Series interview, Michael Oliver Weinberg, Adjunct Associate Professor of Finance and Economics at Columbia University and CIO of family office, MOW & AYW LLC, profiles Charles Van Vleet, CIO and Assistant Treasurer of Textron, Inc.
Textron is a Providence, Rhode Island-based multi-industry company with plants in Texas and Kansas. With around 33,000 employees, the company produces many well-known brands, some in the defense sector, including Bell, Cessna and E-Z-GO. It is ranked 225th on the FORTUNE 500 list of largest U.S. companies.
Scivantage Launches FinTech Incubator Program in Collaboration with Stevens Institute of Technology
The Scivantage FinTech Incubator Program aims to support and accelerate the launch of next generation financial technology products, enabling entrepreneurs and early-stage startups to drive a new era of financial services innovation.
The Incubator will be a 12-week program that empowers entrepreneurs and early-stage startups to develop dynamic and disruptive technology that will transform the Financial Services industry.
Through a competitive process, entrepreneurs will be selected to participate in the incubator program during each cycle, with each receiving:
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.