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After more than five years of deliberation, the $115 billion New York City Retirement Systems finally took the plunge and began the process of investing in hedge funds. For its first step, in March 2011, three of the funds that make up the municipal system invested a combined $450 million in a separate account managed by New York–based fund-of-funds manager ­Permal Group.

The second step? Investing directly into single-­manager hedge funds with the assistance of the system’s hedge fund consultant, New York–based Aksia. Seema Hingorani, head of public equities and hedge funds at New York City’s Bureau of Asset ­Management who herself worked at hedge funds for several years and even ran her own fund, sees value in the two-­pronged approach. “Entering funds of funds first would get us invested in a critical mass of high-­quality hedge funds both quickly and efficiently, to start diversifying our overall portfolio while we built more of the back-­office internal infrastructure for our eventual direct program,” she says. At the same time, while the system’s investment professionals are confident they can make their own hedge fund investments, they wanted to access smaller, lesser-­known hedge funds, which Permal could help them find. Partnering with the fund-of-funds firm also is giving the pension system a leg up in terms of knowledge, expertise and intelligence on the sector.

So far the plan is working. Last year the Permal fund-of-funds portfolio lost 2.98 percent, net of fees — relative to the 4.26 percent decline in the InvestHedge composite index, that was not a bad result, especially given the tough market ­conditions.

Permal, which oversees $20 billion, stands at No. 6 in Institutional Investor’s annual Fund of Funds 50 ranking of the world’s largest funds-of-funds managers as ranked by assets under management as of January 3 (complete results can be found on ­ In total, the largest 50 funds-of-funds firms started the year with $503 billion under management, down from the $525 billion combined total of the top 50 at the beginning of 2011.

Permal’s unique partnership with New York’s retirement system is but one example of the way funds of funds have had to reinvent themselves since the financial crisis of 2008, when clients desperate for ­liquidity fled these firms in droves. ­Industry assets have shrunk by 42.6 percent since June 2008, when the top 50 funds-of-funds firms managed a combined $877 billion. A February 2012 Deutsche Bank study of the hedge fund industry found funds of funds experienced $7.2 billion in net outflows in 2011 alone.