Author: Ted Ballantine

Startup hedge fund Mill Hill Capital was seeded this month by Protege Partners, according to the firm.

Mill Hill was founded in 2015 by investment management vet David Meneret, who previously worked at Macquarie in various roles since 2008, including head of securitized debt and financials trading.

The size of Protege’s investment is unknown. In the recent past, the firm has seeded managers with dollar amounts between $50 million and $125 million.

More info on Mill Hill, from Reuters:

As a trained engineer with degrees from Columbia and the Ecole Centrale Paris, Meneret has spent the last year readying the new fund’s launch with the help of former colleagues from global investment banking group Macquarie. Mill Hill now employs six people and will be largely numbers oriented, relying heavily on data and building models to make all types of trading decisions, Meneret told Reuters.

Meneret’s team includes former Macquarie colleagues Gaurav Singhal, Hongwei Cheng and Robert Perdock. They have experience running a so-called market-neutral relative value credit hedge fund that seeks to exploit differences in the price or rate of similar securities, after having worked at the Macquarie Credit Nexus Fund. David Modiano joined Mill Hill as head of business development and investor relations early this year.

FinAlternatives has some insight on Mill Hill’s strategy:

The new manager’s strategy will be focused on market-neutral relative value trading in U.S. credit, seeking opportunities across CLOs, corporate financials, corporate transportation, aircraft ABS, esoteric ABS, non-agency mortgage-backed securities, and credit indices, according to the company.

Mill Hill will reportedly utilize a combination of asset-level fundamental analysis and market-implied data-driven proprietary cash flow models to identifying long/short opportunities across asset classes, as well as a systematic approach to risk and portfolio management.

Mill Hill plans to start trading in November.

The new investment policy of China’s pension systems — which allows a portion of funds to be invested in public markets — could lead to mismanagement and corruption, wrote one of the country’s most influential newspapers this week.

Previously, pension money could only be invested in treasuries and similar low-yield instruments. But a new rule allows a portion of the money to be invested in the country’s stock market.

It’s a new frontier that opens up the opportunity for mismanagement in a country where graft is rampant, according to the newspaper.

From Reuters:

The influential state-run newspaper Global Times said late on Tuesday in its English-language edition that announcement from the Ministry of Human Resources and Social Security’s (MOHRSS) decision to proceed with the plan has triggered concerns over the management of the pension funds.

“Managing the pension could be a problem since the funds are currently in the hands of local governments,” Peng Xizhe, dean of the School of Social Development and Public Policy at Fudan University was quoted as saying.

Mismanagement of public funds is known to be rampant.

More than one million have been punished for corruption between 2013 and this September, as president Xi Jinping pushes ahead with a nation-wide anti-graft campaign, according to party statistics, though many only get administrative punishments.

Alaska Governor Bill Walker on Tuesday said he’d tabled a plan to issue $3.3 billion in pension obligation bonds.

The decision to scrap the plan comes as few members of the state Senate supported the idea. Credit rating agency S&P also told the state the bond issuance could lead to a credit downgrade.

More from Reuters:

“While we believe the financial benefits of issuing state pension obligation bonds significantly outweigh the financial risks, we recognize the need for legislative input,” Walker said in a statement.

Walker met with Senate Finance Committee members this week where they warned against proceeding with the sale out of concern about taking on more debt.

“Given their lack of support, I have decided not to proceed with the issuance at this time,” he said.

Credit ratings agency S&P Global Ratings had warned that Alaska could face a credit downgrade if it proceeded with the bond transaction.

“Not selling them now may delay the downward pressure on the rating, but absent fiscal reforms, many of the same fiscal pressures remain,” S&P’s Gabriel Petek told Reuters on Tuesday.

Institutional investors are becoming more interested in senior housing, especially as transparency grows around performance metrics, according to panelists at last month’s 2016 NIC Fall Conference.

One such panelist was a high-ranking official at one of the largest institutional investing bodies in the world: Canada’s $130 billion Public Sector Pension Investment Board (PSP Investments).

Transparency around performance metrics is key for institutional investors to truly dive in. Here’s what the PSP official had to say:

“The demographics are compelling,” said Neil Cunningham, senior vice president, global head of real estate investments, PSP Investments, a $130 billion fund that manages the pension assets of the Canadian armed services and public service employees. “We’ve made a tactical allocation to overweight U.S. seniors housing.”

[…]

Seniors housing has gained more acceptance among institutional investors, noted Cobb of Hamilton Lane, though she added that investors still need to be educated about the product. Cunningham believes that as transparency improves and the seniors housing market becomes better known, it will be a standard part of a portfolio because of the quickly aging population.

As an investor, Cunningham at PSP wants the operator to have at least a 20% investment in the property. With a stake in the project, the operator will have a solid knowledge of the market and submarkets, he said.

PSP is usually on the cutting edge of institutional investing trends. They are one of the world’s largest infrastructure investors, and along with other giants like CalPERS and the CPPIB, help pave the way for pension funds into new markets.

An Institutional Investor piece from April characterizes the activity of institutional investors so far:

Thus far, much of the institutional investment in senior housing has been through loans for independent and assisted-living facilities, far more than for those that require staffing of skilled workers, such as nurses, and also involve a higher level of operational risk. But experts say that even nursing facilities are increasingly attractive because of their higher returns, especially when compared with traditional multifamily properties. To help with the learning curve, the National Investment Center for Seniors Housing & Care in Annapolis, Maryland, which collects data about senior housing, has been hosting “new investor” events around the country.

[…]

“It used to be impossible for institutional investors to find quality real estate deals on the ground in markets they didn’t know, but now they can track algorithms, just like stock traders, to be able to pinpoint deals quickly,” says Picken. “They have access to much more opportunity that’s not just in their own backyard.”

Experts note that although it’s a complicated market, technology and the transparency that comes with it have created a welcoming environment for institutional investors to take advantage of the growing demand.

The board of the Dallas Police and Fire Pension Fund — one of the most underfunded plans in the country — approved a plan on Friday that attempts to improve the plan’s funding by cutting benefits and increasing contributions from workers and the city.

As the dwindling funding status of the pension fund made headlines this year, there was a “run on the bank” that saw Dallas’ public safety workers — fearful that their pension benefits were in jeopardy — retire and lock in their pension.

The “run” only exacerbated the pension fund’s issues.

WFAA 8 describes the plan:

The plan would increase the contributions of police and firefighters who are not in DROP from 8.5 percent to 9 percent.

The contribution of active police officers and firefighters who are in DROP would rise from 4 percent to 9 percent.

The plan calls for ultimately increasing the contribution to 12 percent by 2018, but that requires legislative approval and the city making it legally obligated to provide funding to the plan.

The city has already agreed to increase its contribution from 27.5 percent to $28.8 percent – the highest percent allowed by state law.

It would also spread the pain to retirees. They would see their cost of living adjustments drop significantly drop.

Police and firefighters vote on the plan on Monday, and 65 percent of them need to approve the plan for it to move forward.

Wall Street Journal ran an interesting profile on Wednesday of Steve Edmundson, the CIO of the Nevada Public Employees’ Retirement System.

The System’s investment approach is notable because its very passive; its investment-related expenses rank as just about the lowest in the country, and much of its portfolio is invested in instruments tracking indexes.

Under Edmundson, the System’s returns have been stronger than powerhouses like CalPERS.

Even the office is bare-bones, according to the Wall Street Journal:

His strategy is to keep costs low and not try beating markets, he says. “We’re bare bones.”

On his bare-bones desk is an inbox, a stapler and a tin cup of paper clips and business cards. A desk behind his swivel chair sports his printer and family photos. He has no dedicated Bloomberg terminal and doesn’t watch CNBC.

He brings lunch in Tupperware. “Great days,” he says, are when his wife makes lunch—a BLT or tuna-fish sandwich. Otherwise, it is leftover fish or salads. “I don’t want to spend $10 a day for lunch.”

From his one-story office building in Carson City, Mr. Edmundson commands funds whose returns over one-year, three-year, five-year and 10-year periods ending June 30 bested the nation’s largest public pension, the California Public Employees’ Retirement System, or Calpers, and deeply-staffed plans of many other states.

More:

When Mr. Edmundson joined the Nevada plan in 2005 as an analyst, roughly 60% of its stocks were in indexes. He turned it even more passive after becoming chief investment officer in 2012. He fired 10 external managers, and, by 2015, all of its stock and bondholdings were in passively managed funds.

Its outside-management bill is about one-seventh the average public pension’s, according to Nevada plan documents and Callan Associates, which tracks retirement-plan expenses.

If Nevada consumed a typical Wall Street diet, it would pay roughly $120 million in annual fees. In 2016, Nevada paid $18 million.

Read the whole thing here.

The New York State Common Retirement Fund has lost $3.8 billion since 2008 on under-performing hedge funds, according to a 20-page report from New York State Department of Financial Services.

[View the report here.]

The report claims that hedge funds are the worst-performing asset class in the pension fund’s portfolio, and a combination of management fees and under-performance have cost the fund billions.

From Reuters:

The New York State Common Retirement Fund, which oversees $178 billion in assets and is the third-largest U.S. pension fund, paid $1 billion in fees to hedge fund managers over the last eight years, the regulator said in the report. The funds underperformed to the tune of $2.8 billion, said the regulator, which oversees banks and insurance companies in the state.

Hedge funds, according to the 20-page report, are the “worst of the six asset allocation classes” in which the pension fund invests. Many hedge funds are now making the same types of bets, and the state’s Common Retirement Fund arrived late to an asset class where a small number of investors made eye-popping returns years ago, the report said.

[…]

Hedge funds that the New York State Common Retirement Fund has invested in lost nearly 5 percent in fiscal 2016, according to the report. The state made investments with some of the industry’s most highly respected hedge funds, including Nelson Peltz’ Trian Fund Management, John Paulson’s Paulson & Co, Daniel Och’s OZ Advisors and Ray Dalio’s Bridgewater Associates.

The regulator, in the report, blames New York State Comptroller Thomas DiNapoli, the sole trustee overseeing the state pension fund, for “letting outside managers rake in millions of dollars in fees regardless of hedge fund performance, and tolerating large private equity fees and expenses without obtaining necessary transparency.”

The Comptroller’s Office responded to the report by calling it “unprofessional” and untrue. From Reuters:

DiNapoli’s spokeswoman, Jennifer Freeman, responded in a statement that “It’s disappointing and shocking that a regulator would issue such an uninformed and unprofessional report.” The report was emailed to the comptroller’s office five minutes before it was provided to the press, Freeman said.

The comptroller’s office has taken “aggressive steps” to reduce hedge fund investments and limit fees, Freeman said. Those measures include reducing the pension fund’s hedge fund allocation to 2 percent of assets from 3 percent and not putting money into a hedge fund for more than a year, Freeman said.

The Ontario Teachers’ Pension Plan has added wine to its portfolio.

The pension fund bought Constellation Brands Inc.’s wine business for a reported $780 million, according to a statement on Monday.

More from Bloomberg:

Ontario Teachers’, Canada’s third-biggest pension fund, said it will be partnering with the existing management team at Constellation Brands Canada, including CEO Jay Wright.

The business is “an ideal addition to our consumer portfolio,” Jane Rowe, Ontario Teachers’ senior vice president of private capital, said in a separate statement. “The company is already the undisputed market leader in the Canadian wine industry and has excellent potential for continued growth and value creation.”

Even as it offloads the Canadian business, Constellation is shoring up its lineup of pricier wines. The company announced Monday that it had agreed to acquire the Charles Smith collection of five super- and ultra-premium wines for about $120 million. Constellation also completed the purchase of High West Distillery and bought a minority stake in Bardstown Bourbon Co.

Constellation has called itself Canada’s leading wine company.

A participant in Wells Fargo’s 401k plan filed a proposed class action suit last week (Oct. 7), accusing the bank of allowing employees to continue investing their retirement savings in company stock despite knowing the price was artificially inflated due to the now-uncovered cross-selling scheme.

Roughly one-third — $12 billion – of Wells Fargo’s 401k assets are invested in its own stock.

Wells Fargo has dominated headlines this month after it was discovered its commercial banking unit was engaging in a cross-selling scheme in which customers were signed up for unauthorized accounts and products.

Since the news broke, of course, the stock has taken a 10% hit.

Does the suit have a chance? Bloomberg BNA explores:

According to the complaint, Wells Fargo’s stock price nearly doubled during the six-year period of increased cross-selling, before dropping in value once news of the scheme broke.

If recent court rulings are any indication, Wells Fargo plan participant Francesca Allen may face an uphill battle in her attempt to hold the company liable under ERISA. In the past month alone, courts have rejected similar challenges against BP Plc, Whole Foods Corp. and RadioShack Corp. In all three cases, the courts found that employees failed to overcome the high bar recently set by the U.S. Supreme Court for cases challenging stock losses under ERISA.

This most recent suit seeks to hold Wells Fargo liable for losses suffered by as many as 350,000 participants in the company’s 401(k) plan, which holds assets of about $35 billion. In addition to regulatory fines and stock losses, the complaint asserts that the company’s alleged misdeeds have led to significant lost business and “untold reputational damage.”

The Supreme Court ruling mentioned above is FIFTH THIRD BANCORP ET AL.v. DUDENHOEFFER ET AL., which removed one set of guidelines for stock-drop cases like this one, and imposed another. But the new guidelines aren’t turning out to be any more plaintiff-friendly than the last.

Pensions & Investments explains:

The guidelines in a landmark Supreme Court ruling on stock-drop cases are turning out to be almost as tough on plaintiffs as the standard the court nullified.

[…]

In that ruling, the Supreme Court nullified a defense known as the “presumption of prudence,” which was based on a 1995 Philadelphia federal appeals court ruling. This defense enabled sponsors to convince most judges that lawsuits should be dismissed at the initial pleading stage rather than at the trial stage. In doing so, companies avoided the heavy expenses of pretrial discovery and/or the trial itself.

In its place, the court issued guidance to lower courts to determine whether they should accept or dismiss a stock-drop case based on fiduciaries’ administering company stock funds in defined contribution plans. So far, ERISA attorneys say, the ruling appears to have been stricter than originally believed.

[…]

The Dudenhoeffer ruling “certainly has caused the plaintiffs to think twice and be more conservative in their decisions” to sue sponsors, said Nancy Ross, a partner at Mayer Brown, Chicago.