The $34 billion Victorian  Funds Management Corporation  (VFMC) has reaped big rewards  from its belief in the hedge fund  managers it backed five or more  years ago.  In its latest performance figures,  which show a headline return of  12.7 per cent against the 10.9 per  cent gained by its benchmark in the  year to June 30, VFMC’s absolute  return and private equity portfolios  were the standout performers.  The absolute return portfolio  boomed 27.1 per cent over the 5.9  per cent gained by its benchmark,  the UBSA Bank Bill index plus 2  per cent annually, while its private  equity book paced 26.5 per cent  over the 13.05 per cent achieved  by its benchmark, the ASX 300  Accumulation Index.  Justin Arter, VFMC’s CEO,  said the results were due to the  “snap back” performance of its  hedge fund managers, many of  whom experienced substantial  client redemptions at the height of  the financial crisis. 

VFMC was not among the  redeemers from these large,  sophisticated, “US east coast” hedge  funds, whose strategies range across  credit and equities, Arter said.  Rather, it saw an opportunity to  lift its stakes with these managers  as new capacity opened up. This  earned the VFMC itself “some  kudos” with the big hedge fund  shops in the process.  “We tend to try and partner  and make a substantial investment  with managers, so we’re not a tiny  part their fund. We’re material,”  Arter said.  VFMC’s current private  equity portfolio was about three  years into an expected seven-year  lifetime, Arter said, meaning that  its recent outperformance was not  attributable to any “harvesting” of  investments.  The program does not extend  to emerging markets, where the  operational conditions required for  private equity investing are not as  mature as in developed markets,  Arter says.

“Private equity depends on real  transparency, on books and records,  on the rule of law. It’s a real deep  dive. It’s seven years.”  He acknowledged the difficulty  of consistently measuring the  unlisted portfolio’s performance  against its listed benchmark –  the listed market moves ahead  of the private market, providing  a mismatch in returns which  makes comparisons difficult – but  questioned whether private equity  indexes, such as those run by State  Street, are mature enough to be  used by large institutional investors.  The current VFMC team  became established last year with  the appointment of Arter, following  a turbulent period in which former  CEO Syd Bone and investments  chief Leo de Bever walked at  different stages of the financial  crisis.  The team was “acutely aware”  that their headline three- and  five-year performance falls below  benchmark, even though many of  them, including CIO Justin Pascoe,  were not at VFMC at the outset of  these periods.