University of California Board of Regents, Oakland, is gradually liquidating its hedge fund portfolio and investing the money in private credit, Jagdeep Singh Bachher, chief investment officer, told the board Thursday.
UC Regents' $81.2 billion pension fund had $2.9 billion in absolute return and its $19.6 billion endowment had a $1.5 billion absolute return portfolio as of Dec. 31.
UC has been investing in hedge funds for 20 years and the strategy failed to provide the hedge the portfolio needed in 2000, 2008 and 2020, Mr. Bachher said.
The investment team is pulling the money out to invest in "something safer," Mr. Bachher said. UC Regents will be redeeming its hedge funds portfolio over three years, or as soon as it can get liquidity, and replacing those strategies with private credit.
UC's pension fund had $2.4 billion in private credit and its endowment had $849 million in private credit as of Dec. 31. As of year end, UC's pension fund still had room in its private credit allocation for more investment with a 3.5% target allocation and a 3% actual investment. However, the endowment is overallocated to private credit, 4% target allocation vs. 4.3% actual weight as of Dec. 31.
Separately, in response to a board member's question, Mr. Bachher revealed that its private equity portfolio has a $4 million exposure to Silicon Valley Bank.
In other actions, the board discussed staff's proposal to commit $2 billion, split between the pension and endowment, using equity and debt, to invest in market-rate real estate located on or near University of California's 10 campuses.
To do this, UC Investments would set up a separate team, which would be compensated at market wages, to explore, acquire, operate, and maintain these properties. During the board meeting, Mr. Bachher referred to the unit as an LLC, or limited liability company.
Properties that the unit could acquire include student, staff, and faculty housing, classroom buildings and laboratory space, a memo to the board stated.
"These would be strictly investment assets, acquired at market rates," the memo said.
The chief investment officer would make the final investment decisions on the properties.
Mr. Bachher said that the investment office already has experience investing in properties in and around UC campuses over the last nine years.
"We've done $1.2 billion of transactions and we made money for the university and I think we can scale it up," Mr. Bachher said.
He said the new model could provide benefits for the staff, students and campus communities. He noted that at one of the currently owned properties, the investment office decided not to raise rents in 2023, even though contractually it had the right to do so.
Mr. Bachher said during the meeting that UC Investments has been criticized in the media for raising rents on properties on or near campuses.
But, he added, UC Investments has a fiduciary duty to earn a return on its investment.