Why One Endowment Is Taking an Unorthodox Approach to Hedge Funds
Texas Tech has partnered with a bank to shore up liquidity.
Texas Tech University is making sure it won’t suffer a cash shortfall.
Amid growing liquidity concerns among its peers, the $1.7 billion endowment has found a unique way to keep cash on hand — with the help of its hedge fund investments.
“We built a very low beta portfolio focused on not losing money,” said Clinton Huff, Texas Tech investment officer, via Zoom. “In this environment, where rates are higher, it’s proven robust.”
Huff, along with senior investment officer Mike Nichols, run Texas Tech’s “stable value” book, which accounts for 40 percent of the endowment’s total portfolio and is split evenly between hedge funds and credit investments. “Where some people were getting rid of hedge funds, we were waiting to see how quantitative tightening would disrupt the market,” Nichols said.
The low beta of the portfolio is the foundation upon which the liquidity solution is built.
Texas Tech partnered with a bank to take some of the liquidity risk off of its books.
In exchange for a fee, Texas Tech transferred its hedge fund investments to a bank, which holds those investments on its behalf. The bank provided cash in exchange for these investments and has become a limited partner to the hedge fund firms in Texas Tech’s place.
When the hedge funds generate returns during the time when the bank is the investor of record, Texas Tech profits. When the hedge funds post losses, the endowment covers them.
The hedge funds within Texas Tech’s portfolio are primarily multistrategy funds, many of which are closed. “We were able to get in at preferential terms before they started extending the duration on their capital,” Huff said.
Texas Tech first implemented this strategy in the thick of the pandemic in the late summer of 2020, although it had been considering adding the approach before Huff joined in 2019.
Setting up the program took effort. Texas Tech had to asks managers whether they could accept a bank as an LP.
“It’s a vanilla financing trade,” Huff said. “The bank is thinking about it as a financing trade. We’re thinking about it as the optionality of cash. It’s a creative structure.”
Texas Tech’s concern over the availability of cash comes at a time of uncertainty in the markets and when liquidity has become a top priority for allocators. With money locked up in private investments, some asset owners have been forced to become sellers on the secondary market to meet their capital commitments.
In recent months, that structure has given the endowment enough liquidity to rebalance its public equity portfolio amid a challenging market. “The portable alpha construct with the liquidity we have behind that gives us staying power to being overweight,” said Tim Barrett, chief investment officer. “I’m not super worried. I don’t have to go to the secondary market and liquidate.”