February 2022 | With Intelligence

Texas Teachers hunts tech-focused emerging HFs

The $204bn system is also building a premier list of EM program advisers

Connor Owen
22 FEB 2022

The Teacher Retirement System of Texas (TRS) will assess tech-focused equity hedge funds and long-only opportunities this year within its emerging manager program.

The $204bn system’s technology sector search initiative will be a key area of focus for its emerging manager program in 2022, Kirk Sims, emerging manager director, shared as part of his annual program updates.

Texas Teacher’s emerging manager program is valued at $2.5bn, of which $527m is allocated to public markets, as of September 2021. The half-billion allocation includes both long-only equities and hedge fund strategies, such as credit, equity long/short, event-driven and equity market-neutral.

The sole requirement set by TRS for prospective emerging managers in public markets strategies, including hedge funds, is to have an AuM lower than $3bn. Initial manager allocations are typically in the $10m to $30m range.

TRS partners with The Rock Creek Group to oversee the public markets side of its emerging manager program, which first opened to hedge fund managers in 2011.

In addition to sourcing tech sector hedge funds for the program, TRS will look to promote existing emerging managers into its main investment portfolio with significantly larger allocations.

The qualifying criteria for a transitional capital program for hedge funds and long-only emerging managers, termed EM Select, was established in collaboration with Rock Creek last year. Managers have been ranked, and two top-tier candidates are in due diligence, Sims shared.

Finally, TRS’ emerging manager team also conducted a deep dive review of their existing hedge fund investments last year with respect to portfolio sizing and structure and evaluating prospective emerging managers. It added two new hedge funds as a result but has not yet disclosed identifying information.

Emerging hedge fund managers keen to engage with TRS were given a number of pointers last month by Lulu Llano, who oversees international equities and directional hedge funds in the system’s main investment portfolio.

Llano advised prospective hedge funds to fine-tune their pitch, ensuring they can articulate a clearly defined investment philosophy and process, but also have patience when dealing with large public pensions like TRS.

“We’re slow-moving, so begin to build a dialogue and connections even if you’re not a fit now – if you invest in cultivating relationships, it could open a door in the future,” she said at TRS’ annual emerging manager conference on January 19.

In search of specialist emerging manager advisers

TRS staff are in the process of reviewing the landscape of third-party emerging manager program advisers, surveying firms that offer emerging manager-type programs across public and private market strategies.

Following this review, the system is developing a premier list for emerging manager industry specialists, which would create a bench of available program advisers.

In addition to Rock Creek, the system currently works with GCM Grosvenor as an emerging manager program adviser.

Other emerging manager program advisers in the space include PAAMCO Prisma and Stable Asset Management; both of which have picked up hedge fund-specific mandates from US pensions in recent years.

PAAMCO was selected as the Massachusetts Pension Reserves Investment Management Board’s emerging hedge fund manager lead in December 2021, and is also retained by the Employees Retirement System of Texas for its hedge fund seeding platform.

Meanwhile, Stable was hired as the Los Angeles County Employees Retirement Association’s emerging hedge fund lead in December 2020. Four new managers were onboarded into the program in the third quarter of last year, receiving a combined allocation of $155m.