Edmond Fong is the Managing Director of Absolute Returns for the University of California’s Office of the CIO of the Regents. He joined the University in 2010. In this role, Mr. Fong manages the hedge fund portfolio for three separate pools of money that make up the Regents’ massive $98.2 billion in AUM, including the $8.9 billion Endowment. Before joining the University of California system, Mr. Fong held positions at the hedge fund firm Amaranth Advisors, the Carlyle Group’s Blue Wave hedge fund and Lehman Brothers. His credentials include a bachelor’s in economics from Carnegie Mellon University in Pittsburgh, Pennsylvania and an MBA from the University of Chicago. In 2013, Mr. Fong was named a Hedge Fund Rising Star by Institutional Investor.
Mr. Fong was recently named on Trusted Insight’s ranked list of The Top 30 University Endowment Investors In Hedge Funds. He graciously took the time to speak with Trusted Insight as he helped his daughter prepare for school on the morning of September 23. The following interview has been edited and condensed.
Trusted Insight: How vast is the University of California system? What does the Regents’ $98.2 billion endowment support?
Edmond Fong: The general endowment pool serves the 10 campuses of the University of California. Overall, the UC system comprises 10 campuses as well as five medical centers and three research laboratories.
Trusted Insight: Can you tell me what the breakdown is as far as the various pools of money that make up the Regents’ $98.2 billion of AUM.
Edmond Fong: Sure. In addition to the $8.9 billion endowment, there’s a $55 billion pension fund, a $14.2 billion working capital pool (made up of $7.4 billion in the total return investment pool and $6.8 billion in the short term investment pool) and a retirement savings program valued at $20.1 billion.
Trusted Insight: Do they all have investments in hedge funds?
Edmond Fong: Of the pools we manage, three have hedge fund investments, as of June 30, 2015: $2.1 billion, or 23.6%, of the endowment is in hedge funds; $3.4 billion, or 6.2%, of the pension is in hedge funds and of the total return pool $750 million or 10.3% is in hedge funds.
Trusted Insight: When did the endowment begin investing in hedge funds?
Edmond Fong: 2003.
Trusted Insight: What were your returns for hedge funds and for the endowment overall for 2014?
Edmond Fong: For the 2014 calendar year, returns for the hedge fund pool were roughly 9.2%. Our fiscal year end is June 30, so what you may see in the press from a performance standpoint will likely relate to a fiscal year-end basis. For the fiscal year 2014-2015 (ending June 30, 2015), the endowment earned 7.2% in returns and hedge funds earned 6.7%.
Trusted Insight: How many hedge funds do you manage?
Edmond Fong: We have relationships with 26 hedge funds at the moment. Going forward we’re going to try to keep a pretty tight roster. In six months to a year we would prefer to have fewer relationships, maybe 15-20 hedge fund managers.
Trusted Insight: What do you look for in a hedge fund manager?
Edmond Fong: We do a lot of due diligence up front, and we take a lot of time getting to know folks before we make an investment. We like to think of ourselves as long-term investors, and we’ve been with some folks for many years. We don’t believe hedge funds are an asset class rather they are just an amalgam of different strategies seeking to exploit inefficiencies. We don’t believe you can trade them. As far as our approach, it’s quite simple: we underwrite people and processes. A well articulated and consistent process with the right pairing of human capital is key. Alignment of interests are also important. Thereafter, our ongoing monitoring is about ensuring that the things we underwrote are still in place.
Trusted Insight: In addition to cutting back on the number of hedge fund investments, do you foresee any other future changes to your hedge-fund related investments?
Edmond Fong: We are seeking to be strategic partners with managers. We want to be more than just capital providers, we want to be thought of as solutions providers. That is, how can we better align ourselves with managers and help them be more successful?
Trusted Insight: How have your hedge fund investments affected the endowment’s performance?
Edmond Fong: Our goal is to create a portfolio that generates returns that are less correlated to the rest of our portfolio, which is invested in traditional assets such as stocks and bonds. We also strive to produce superior risk adjusted returns. We believe we have achieved these goals. In addition, we think that an ancillary benefit of a hedge fund program is the cross-pollination of investment ideas among different asset classes. Hedge funds often traffic in interesting areas and can come across some pretty unique investment opportunities that we can take advantage of. So knowledge transfer and idea generation and propagating to the rest of our portfolio is important.
Trusted Insight: Are you worried about the talk of proposed changes to the carried interest charge?
Edmond Fong: Not particularly. Our primary concern is whether we get what we’re paying for and whether the managers themselves are taxed at a certain rate is outside of that and it’s up to someone else to decide what’s fair. Our goal is to create a portfolio that generates alpha, but we also want to make sure we’re paying a fair price for that alpha.
Trusted Insight: Do you have an investment philosophy you’d like to share?
Edmond Fong: Alpha is very difficult to generate consistently—and it can be competed away. Therefore, it’s important to avoid the crowd. We prefer to stay nimble and opportunistic.
To learn more about the top endowment investors in hedge funds, check out Trusted Insight's list of Top 30 University Endowment Investors in Hedge Funds.
Mr. Fong was recently named on Trusted Insight’s ranked list of The Top 30 University Endowment Investors In Hedge Funds. He graciously took the time to speak with Trusted Insight as he helped his daughter prepare for school on the morning of September 23. The following interview has been edited and condensed.
Trusted Insight: How vast is the University of California system? What does the Regents’ $98.2 billion endowment support?
Edmond Fong: The general endowment pool serves the 10 campuses of the University of California. Overall, the UC system comprises 10 campuses as well as five medical centers and three research laboratories.
Trusted Insight: Can you tell me what the breakdown is as far as the various pools of money that make up the Regents’ $98.2 billion of AUM.
Edmond Fong: Sure. In addition to the $8.9 billion endowment, there’s a $55 billion pension fund, a $14.2 billion working capital pool (made up of $7.4 billion in the total return investment pool and $6.8 billion in the short term investment pool) and a retirement savings program valued at $20.1 billion.
Trusted Insight: Do they all have investments in hedge funds?
Edmond Fong: Of the pools we manage, three have hedge fund investments, as of June 30, 2015: $2.1 billion, or 23.6%, of the endowment is in hedge funds; $3.4 billion, or 6.2%, of the pension is in hedge funds and of the total return pool $750 million or 10.3% is in hedge funds.
Trusted Insight: When did the endowment begin investing in hedge funds?
Edmond Fong: 2003.
Trusted Insight: What were your returns for hedge funds and for the endowment overall for 2014?
Edmond Fong: For the 2014 calendar year, returns for the hedge fund pool were roughly 9.2%. Our fiscal year end is June 30, so what you may see in the press from a performance standpoint will likely relate to a fiscal year-end basis. For the fiscal year 2014-2015 (ending June 30, 2015), the endowment earned 7.2% in returns and hedge funds earned 6.7%.
Trusted Insight: How many hedge funds do you manage?
Edmond Fong: We have relationships with 26 hedge funds at the moment. Going forward we’re going to try to keep a pretty tight roster. In six months to a year we would prefer to have fewer relationships, maybe 15-20 hedge fund managers.
Trusted Insight: What do you look for in a hedge fund manager?
Edmond Fong: We do a lot of due diligence up front, and we take a lot of time getting to know folks before we make an investment. We like to think of ourselves as long-term investors, and we’ve been with some folks for many years. We don’t believe hedge funds are an asset class rather they are just an amalgam of different strategies seeking to exploit inefficiencies. We don’t believe you can trade them. As far as our approach, it’s quite simple: we underwrite people and processes. A well articulated and consistent process with the right pairing of human capital is key. Alignment of interests are also important. Thereafter, our ongoing monitoring is about ensuring that the things we underwrote are still in place.
Trusted Insight: In addition to cutting back on the number of hedge fund investments, do you foresee any other future changes to your hedge-fund related investments?
Edmond Fong: We are seeking to be strategic partners with managers. We want to be more than just capital providers, we want to be thought of as solutions providers. That is, how can we better align ourselves with managers and help them be more successful?
Trusted Insight: How have your hedge fund investments affected the endowment’s performance?
Edmond Fong: Our goal is to create a portfolio that generates returns that are less correlated to the rest of our portfolio, which is invested in traditional assets such as stocks and bonds. We also strive to produce superior risk adjusted returns. We believe we have achieved these goals. In addition, we think that an ancillary benefit of a hedge fund program is the cross-pollination of investment ideas among different asset classes. Hedge funds often traffic in interesting areas and can come across some pretty unique investment opportunities that we can take advantage of. So knowledge transfer and idea generation and propagating to the rest of our portfolio is important.
Trusted Insight: Are you worried about the talk of proposed changes to the carried interest charge?
Edmond Fong: Not particularly. Our primary concern is whether we get what we’re paying for and whether the managers themselves are taxed at a certain rate is outside of that and it’s up to someone else to decide what’s fair. Our goal is to create a portfolio that generates alpha, but we also want to make sure we’re paying a fair price for that alpha.
Trusted Insight: Do you have an investment philosophy you’d like to share?
Edmond Fong: Alpha is very difficult to generate consistently—and it can be competed away. Therefore, it’s important to avoid the crowd. We prefer to stay nimble and opportunistic.
To learn more about the top endowment investors in hedge funds, check out Trusted Insight's list of Top 30 University Endowment Investors in Hedge Funds.