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Ideal World

In an ideal world, Casscells would like the managers to have a hurdle rate of either Treasury bills or LIBOR. Once they achieved that rate, then they would get their stated incentive fees. Most of the market neutral managers they use have a hurdle rate. Some fixed income arbitrageurs do, but most event arbitrageurs do not.

She would also prefer that the managers be vested in their carry over time so that their interests were better aligned with those of the investor. This is also referred to as a claw-back. For example, under current practice, if the manager earns $100 of carry in year one and then has a loss in year two, the manager does not lose any of the carry. But if only one-third of the carry were vested each year, the manager would participate alongside investors in losses as well as gains for the unvested portion.

Ideally, she would also like more transparency of positions or to have a good third-party risk-reporting system. Some managers will give good transparency on positions but often they are not the most successful or established managers.

Most managers will talk about their portfolios. A few will even mail it to investors. A subset of fixed income managers send out regular risk reports that detail the exposure and leverage.

CASE STUDY INTERVIEW: VASSAR COLLEGE

Vassar College has been allocating to hedge funds since 1992. While the percentage has gradually increased over the years, Jay Yoder, director of investments,* says since 1995 the allocation has been in the double digits. It currently stands at about 11 percent. Alternative investments overall—including hedge funds, venture capital, buyouts, real estate, and energy—totaled 29 percent of the $675 million endowment as of June 30, 2000.

In 1993, the endowment was invested with only two hedge funds. By 1999, it had five allocations. The college wants exposure to different strategies and has allocated to one growth equity long/short manager (Tupelo); two multistrategy funds—one having a high return/high risk

*Since the interview took place in July 2000, Yoder has left Vassar College and is now at the Smith College endowment.