Ted Ballantine | Pension360

Indiana Pension Fund Assets Hit Record High

Recent data revealed that assets of the Indiana Public Retirement System (INPRS) hit at all-time high of $30.2 billion in 2014.

Fund officials attribute the record to “great” investment returns. The fund returned 13.7 percent in fiscal year 2013-14, which ended June 30. That number falls well short of what the S&P 500 returned over the same period, but the INPRS improved its funding ratio because of a confluence of factors, including employers making full contributions into the system.

5 Potential Outcomes Of CalPERS’ Hedge Fund Pullback

The last week has seen a flurry of debate of what CalPERS’ hedge fund divestment actually means in the bigger picture.

Is this an instance of just one fund shifting its investment strategy? Or is it emblematic of a larger, accelerating trend?

At FinAlternatives, the founder of a hedge fund marketing firm has weighed in on the potential outcomes of CalPERS’ decision. Don Steinbrugge writes:

Agecroft Partners believes we will see the following 5 outcomes:

1. Continued pressure on hedge fund fees for large mandates

Over the past 5 years there has been a strong trend of hedge funds increasingly offering fee breaks for large pension funds and the clients of institutional consulting firms. These fee breaks began with a discount on management fees only, but now often includes performance fees. Fee breaks vary by manager, but for a typical hedge fund with a 2 and 20 fee structure the discount is often 25% off standard fees…

2. Pension funds will continue to increase their allocation to hedge funds

The average public pension fund will continue their long term trend of increasing their allocation to hedge funds in order to enhance returns and reduce downside volatility of their portfolio…

3. More focus on smaller hedge fund managers

In a study conducted from 1996 through 2009 by Per Trac, small hedge funds outperformed their larger peers in 13 of the past 14 years. Simply put, it is much more difficult for a hedge fund to generate alpha with very large assets under management…

Steinbrugge writes much more over at the link, here.

Steinbrugge is the Founder and Managing Partner of Agecroft Partners, a global hedge fund consulting and marketing firm.

CalSTRS Doubles Down On Clean Energy Investments

At least one pension fund is seeing the potential for “green” (read: big money) in clean energy investments.

CalSTRS announced plans to significantly ramp up investments in the “green” sector from $1.4 billion to $3.7 billion over the next 5 years. AP reports:

CalSTRS CEO Jack Ehnes says the pension fund is seeing more opportunities in low-carbon projects and technologies. The fund is hoping also to help push for stronger policies aimed at fighting climate change, Ehnes says.

If policies are adopted that impose a price on carbon emissions to discourage pollution, the fund could increase its investments further, to $9.5 billion.

The fund has a $188 billion portfolio.

The clean energy and technology investments will be made through holdings in private equity firms, bonds, and infrastructure as suitable investments come available, the fund says.

The move comes on the heels of calls in recent years for pension funds to divest from fossil-fuel dependent investments. From the Financial Times:

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from 350.org, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.

No pension funds have yet divested from fossil fuel-dependent investments for social reasons, including CalSTRS.

But you can expect pension funds to go where they think the money is; in the case of CalSTRS, they are seeing “green” in clean energy going forward.

Photo: Paul Falardeau via Flickr CC License

San Diego Fund To Consider Firing Risk-Keen CIO

The San Diego County Employees Retirement System (SDCERS) is by now notorious for its risky investment strategies, which include heavy use of leverage.

Pension360 has covered the pension fund’s board meetings this month, during which some trustees wondered aloud whether the fund should dial back risk.

Now, the board is considering another item: whether the fund’s chief investment officer should keep his job. Reported by the San Diego Union-Tribune:

The county pension board voted Thursday to formally consider firing their Texas investment consultant.

The decision on the future employment of Salient Partners of Houston was set for Oct. 2, one day after the last of the county’s in-house investment staff was scheduled to go to work for the investment firm as part of a years-long outsourcing push.

In the meantime, Chief Investment Officer Lee Partridge of Salient will no longer be permitted to risk up to five times the amount of San Diego County’s pension money invested under his “risk-parity” strategy.

The board considered yesterday the idea of allowing higher amounts of leverage in pension fund investments. But that idea was voted down by a measure of 5-2.

Now, the board has suspended its CIO’s ability to use any leverage at all until the board votes on the CIO’s future. That vote will be held in early October.

Photo by dktrpepr via Flickr CC

Dallas Fund Loses Nearly $200 Million On Real Estate Ventures

The Dallas Police and Fire Pension System knew that its real estate losses were bad, but they didn’t learn the exact figures until a Thursday board meeting.

Trustees of the $3.3 billion pension fund learned Thursday that it has lost $196 million on real estate investments made in 2005 and later. Those losses were a big reason why the fund’s overall portfolio in 2013 returned just 4.4 percent.

Professor: Pension Funds Need To Rethink Manager Selection

A few hours after news broke of CalPERS cutting ties with hedge funds entirely, one anonymous hedge fund manager opined: “I think it’s not hedge funds as an asset class [that are underperforming]. It’s the ones they invest in.”

But was it really manager selection that was the root cause of CalPERS’ disappointment with hedge funds? Dr. Linus Wilson, a professor of finance at the University of Louisiana, thinks so.

Particularly, he thinks pension funds are ignoring data that suggests newer, smaller managers perform better than the older, larger hedge funds that pension funds typically prefer. He writes:

CalPERS and other institutional investors such as pensions, endowments, and sovereign wealth funds have ignored the wealth of data suggesting that their manager selection criteria is fatally flawed. Hedge Fund Intelligence estimates that on average hedge funds have returned 3.7% year to date. Yet the S&P 500 (NYSEARCA:SPY) has returned over 8% over that period.

Most institutions and their consultants implicitly or explicitly limit their manager selection criteria to hedge funds with a multi-year track record (three years or more) and assets under management in excess of $250 million. The AUM screen is probably higher; $1 billion or more. Unfortunately, all the evidence shows that choosing hedge funds with long track records and big AUM is exactly the way to be rewarded sub-par returns.

A recent study by eVestment found that the best absolute and risk-adjusted returns came from young (10 to 23 months of performance) and small (AUM of less than $250 million) hedge funds. My anecdotal evidence is consistent with this fact. My young and small fund, Oxriver Captial, organized under the new JOBS Act regulations, is outperforming the bigger more established funds.

More data on the performance of newer hedge funds:

One study eventually published in the top-tier academic journal, the Journal of Financial Economics, found that, for every year a hedge fund is open, its performance declines by 0.42%. The implication is that hedge fund investors should be gravitating to the new managers if they want high returns. Yet another study by Prequin found that even when established managers launch new funds, those funds underperform launches by new managers.

The Prequin study found that managers with three years or less of track record outperformed older managers in all but one of seven strategy category. The median strategy had the new managers beating the older ones by 1.92% per annum. Yet, that same study found that almost half of institutional investors would not consider investing in a manager with less than three years of returns.

Pension funds have repeatedly justified forays into hedge funds by pointing out the potential for big returns, as well as the portfolio diversification hedge funds offer.

Dr. Wilson doesn’t deny those points. But to truly take advantage of hedge funds, he says, pension funds need to rethink their approach to manager selection. That means investments in smaller, newer hedge funds.

Blackstone Backs CalPERS Hedge Fund Pullout

Blackstone was one of the investment firms that helped CalPERS get its start in hedge funds over a decade ago. But the firm’s president, Tony James, told a crowd at a private equity event on Thursday that he supported the pension fund’s pullback from hedge funds. From Chief Investment Officer:

Speaking at a private equity event in New York yesterday, James said CalPERS’ move was “wise” given the poor returns generated by the allocation, dubbed “Absolute Return Strategies” (ARS) by the pension.

He added: “A lot of people think about hedge funds as a way to get higher returns. Hedge funds are a way to play the stock market with somewhat lower volatility and somewhat lower returns. You don’t expect hedge funds to get shoot-the-lights-out returns. You save that for private equity and for real estate.”

CalPERS hired Blackstone in 2001 to invest $1 billion in hedge funds.

Over the past 10 years, the pension fund’s hedge fund portfolio produced annualized returns of 4.8 percent, according to Bloomberg.

Ex-Pension CIO Partially Cleared of Allegations of Hiding Poor Investment Performance, But Suspicions Remain

A months-long probe into the ex-CIO of the Pennsylvania State Employees Retirement System (PSERS) has wrapped up this week, and the results are in: the investigation found no evidence that the former CIO, Anthony Clark, lied to the pension board about the poor performance of an investment.

But, investigators say, the lack of evidence wasn’t so overwhelming as to dispel suspicion entirely. One investigator said that whether Clark lied to the pension board is still “open to question”.

Other allegations against Clark included not consistently working a full workweek and conducting personal investment business on the job. An anonymous employee at the fund had originally tipped off investigators, but the subsequent investigation uncovered no wrongdoing by Clark in those areas.
Reported by the Pittsburgh Post-Gazette:

A law firm hired by the Pennsylvania State Employees’ Retirement System to investigate allegations against a former chief investment officer has found no evidence of broken laws or state rules.

But after an eight-month probe into an investment decision and the personal trading and work hours of Anthony Clark, attorneys with the firm Obermayer Rebmann Maxwell & Hippel refrained from concluding whether the investment chief had deceived the SERS board over an investment with hedge fund Tiger Asset Management. The agency announced the conclusion in a letter released Wednesday.

“Obermayer found no evidence of illegality in what turned into an under-performing investment mainly due to its gold component,” wrote Walter Cohen, a past acting attorney general of Pennsylvania.

“Whether Clark intentionally misled the Board by seeking to conceal Tiger’s poor performance is open to question but the Board remained vigilant in monitoring the Tiger investment until its dissolution.”

[…]

Mr. Clark also had been accused of conducting personal investment activities at work and failing to spend a full work week on his SERS responsibilities. In his letter summarizing the firm’s findings, Mr. Cohen wrote none of his associates interviewed could substantiate the allegation of “day trading.“

Clark resigned from his position with PSERS in 2013, soon after the allegations surfaced. He hasn’t worked since.

Photo by www.SeniorLiving.Org

Texas Fund Cuts Hedge Fund Allocation By 1 Percent

The Teacher Retirement System of Texas, one of the largest pension funds in the country, announced Thursday it would cut its allocation to hedge funds by 1 percent. It also changed its target allocations for equities and bonds.

Reported by Bloomberg:

The board of the $126 billion Texas system approved the change today following an asset allocation study, Howard Goldman, a spokesman, said by e-mail. Texas will reduce hedge funds to 8 percent of the pension from 9 percent, according to board documents.

[…]

Besides reducing its bet on hedge funds, the Texas pension lowered the portion of assets it gives to equities by 4 percentage points and to fixed-income securities by 2 percentage points, while adding 5 percentage points each to risk parity and private markets, according to board documents. Risk parity is a strategy for investing based on allocation of risk and private equity and real assets.

“These new allocations are expected to be funded from a diverse set of asset classes across the trust in order to increase the overall probability that TRS will be able to achieve the 8 percent actuarial return target,” according to a statement provided by Goldman.

TRS Texas is approximately 80 percent funded. It is the sixth-largest public pension fund in the United States.

Iceland Officials Fret Growing Bubble Threatens Entire Pension System

Pension officials in Iceland are worried that some government policies are putting the country’s retirement savings at risk.

Iceland imposed capital controls in 2009 after the failure of major banks. The rules are designed to spur Iceland’s economy, and they’ve worked—Iceland’s main stock index is up 70 percent since the end of 2008.

But experts worry that the rules, which prevent pension funds from investing outside of Iceland, have created a bubble that could burst and take with it the retirement savings of the country’s citizens.

From Bloomberg:

Iceland’s 2.7 trillion kronur ($22.7 billion) of pensions are under threat by capital controls that risk generating bubbles in both equity and bond markets, the second-largest manager of retirement money said.

“We’re seriously concerned” that controls on the krona, imposed in 2008 to prevent a flight of capital, are risking Iceland’s entire pensions system, Asta Rut Jonasdottir, chairman of the Pension Fund of Commerce, said in an interview in Reykjavik on Sept. 11. “We’re worried about bubble formation and the work related to the removal needs to be done swiftly. We’ve waited much, much too long.”

Iceland imposed restrictions on its currency after the crash of its three largest banks plunged the nation into the worst recession since World War II. The controls are preventing pension funds from investing abroad and have led to a doubling of the main stock index and pushed the GAMMA index of Icelandic government bonds up almost 70 percent since the end of 2008.

“There’s a risk of a bubble, whether or not you’re a pension fund or something else, when you’re locked inside some sort of a system,” said Jonasdottir. “There’s a much, much greater risk of a bubble than if the system is open and free. Of course one is considerably worried about this and the limited investment opportunities.”

Iceland’s government is looking for ways to remove the capital controls without harming the economy. They’ve hired economist Anne Krueger and JP Morgan Chase & Company to advise them on the matter.

Photo by Rhett Maxwell via Flicker CC License

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