Texas College Fund Boosts Hedging Citing Concerns on Euro-Debt, Inflation

Texas’s public university endowment, the second-largest U.S. college fund, is expanding derivative use to hedge against a euro-region debt default or a collapse in the dollar, while raising limits on commodities including gold.

About $50 million a year is used for hedges to protect the Permanent University Fund from market risks, Bruce Zimmerman, president of University of Texas Investment Management Co., said in July. The $20.3 billion fund also has about 5 percent of its assets in gold, he said.

Overseers of the fund approved changes today to let endowment managers at UTIMCO, as Zimmerman’s company is known, spend as much as 0.75 percent of assets on hedging risks, up from 0.25 percent. Only Harvard University’s $27.6 billion endowment, the largest for a U.S. school, spends proportionately more on hedging among big collegiate funds, Zimmerman said.

“We are in a very uncertain investment environment,” he said at the University of Texas System Board of Regents meeting today. “The lack of clarity of the direction is as opaque as many of us have ever seen.”

The fund may lose a fifth of its value from a euro-region default or a crisis in the dollar, according to a study from the management company. That prompted calls from board members for more aggressive hedging.

The European Central Bank in Frankfurt spent a record amount buying government bonds last week, scooping up Italian and Spanish securities to curb a debt crisis that also has threatened Greece, Ireland and Portugal. The ECB was forced to buy Italian and Spanish bonds on Aug. 8 after national leaders failed to persuade investors the debt crisis would be contained.

“These derivative investments are of the type intended to reduce long exposure or hedge against global interest-rate shocks and risk,” according to documents given to regents.

“I have a lot of confidence in this staff,” said UTIMCO Chairman Paul Foster, who also is chief executive officer of Western Refining Inc. in El Paso. “I am supportive of giving the staff additional authority to make their way through this.”

To contact the reporter on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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