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 commodity investments.
About $70 million a year is used for hedges to protect endowments including the Permanent University Fund from market risks, Bruce Zimmerman, president of University of Texas Investment Management Co., said today. The $20.3 billion permanent fund has about 5 percent of its assets gold, he said. Bullion provides a store of value should the dollar decline.
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 has a bigger endowment, valued at $27.6 billion.
“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.
The hedges against a spread of the European crisis would be limited to the amount paid for the derivative, according to documents given to regents. “These derivative investments are of the type intended to reduce long exposure or hedge against global interest-rate shocks and risk,” the documents say.
“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.”
The Texas fund, started in the 19th century to benefit public colleges, also raised limits on commodity investments to as much as 25 percent of assets, up from 17.5 percent.
Gold futures traded in New York have gained almost 45 percent in the past year. UTIMCO has invested about $750 million in gold with its holdings now valued at about $1.18 billion, Zimmerman said by telephone after the regents’ meeting.
The University of Texas and Texas A&M University systems have shared about $2.4 billion from the endowment fund in the past five years and are slated to get $575 million more in the next 12 months.
UTIMCO also manages about $7 billion in university assets, including $4.8 billion in an intermediate-term fund and $2.1 billion in cash or equivalents, Zimmerman said.