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Another Chicago Pension Law Could Soon Face Legal Challenge

Chicago’s 2014 pension reform law will soon be heard by the state Supreme Court.

But there’s another, lower-profile law – one that eliminated COLAs for retirees in the Chicago Park District pension fund, among other things – that could wind up in court soon, as well.

From the Chicago Tribune:

The law allowing cuts to pension benefits for Park District employees and retirees, signed by then-Gov. Pat Quinn in 2014, could be the next to face a legal challenge.

For the first time, Park District retirees aren’t receiving a COLA, which is suspended this year as part of the overall package aimed at making the pension fund whole. That part of the pension law, which also required increased contributions from both the Park District and its employees, is now the focus of opposition for SEIU Local 73, the Park District’s largest union representing about 2,000 year-round employees.

While most of the law was negotiated with the unions, Local 73 officials claim that the reduction to retirees’ benefits was not. Buoyed by the recent court rulings on other pension funds, the union is exploring its legal options. A flier foreshadowing a lawsuit that hasn’t yet been filed circulated this week, generating excitement among union members, said Adam Rosen, Local 73 spokesman.

A lawsuit has not yet been filed.

The Chicago Park District Pension Fund was about 43 percent funded at the end of 2014.

Photo by bitsorf via Flickr CC License

Rauner Offers $200 Million of Pension Help to CPS – With Strings Attached

Illinois Governor Bruce Rauner on Monday offered $200 million per year in aid to help cover the pension costs of Chicago Public Schools – but the money comes with strings attached.

If the school system takes the money, they have to implement Rauner’s school reform plan, which has big implications for union negotiations.

From the Chicago Sun-Times:

Gov. Bruce Rauner on Monday repackaged a set of reforms he’s pushed since he took office in January, linking them — and an offer of help — to the financial crisis facing Chicago Public Schools.

[…]

As part of the offering, Rauner said Illinois could immediately give $200 million in state aid to offset Chicago Public Schools’ pension costs but only as part of a comprehensive school reform package that includes allowing the city and local towns to opt out of collective-bargaining requirements.

The proposal also would relieve districts of state mandates that schools have to pay for on their own. The governor’s office says these mandates represent major costs and proposes allowing school districts to use third-party contracting for transportation, food service and janitorial work.

“We’re willing right now to bring pension parity for the Chicago Public School system,” Rauner said at a news conference at the Thompson Center. Rauner put that support at $200 million a year.

Of course, before CPS accepts or denies the deal, the state legislature has to do the same. Top Democrats have come out against the proposal.

Photo by Tricia Scully via Flickr CC License

California Pension Initiative Ballot Summary Draws Crossfire

The authors of an initiative giving voters the power to decide whether new government employees get pensions said they will “commission a legal review” of the ballot summary issued yesterday by Attorney General Kamala Harris.

Two previous pension reform initiatives were dropped after sponsors said Harris gave them ballot titles and summaries that were inaccurate and misleading, making voter approval unlikely.

The authors of the new initiative, former San Jose Mayor Chuck Reed and former San Diego City Councilman Carl DeMaio, said “politicians and union bosses” opposing the initiative “continue to try to mislead the public on what the initiative does.”

But a news release from the two leaders of a bipartisan group backing the new initiative, which is aimed at the November ballot next year, did not cite a specific problem with the Harris summary of the initiative.

The initiative leaders previously have said they intended to file the initiative early to allow time for a legal challenge of the title and summary, if needed. Polling to see how the title and summary is received by voters also has been mentioned.

“Reed and DeMaio noted that the next step in their campaign will be to commission a legal review (of) the ballot measure ‘Title and Summary’ concocted by state politicians,” said their news release. “Once that review is completed, DeMaio and Reed will kick off their signature drive to qualify the measure.”

A coalition of public employee unions opposed to the initiative gave Harris, who is running for the U.S. Senate next year, some claim to the middle ground on her ballot summary by drawing fire from both sides.

“We strongly disagree with the attorney general’s elimination of the specific mention of teachers, nurses, police and firefighters in the title and summary,” Dave Low, chairman of Californians for Retirement Security, said in a news release. “They are the bulk of the public servants whose retirement security and death and disability benefits would be abolished by this heavy-handed measure.”

The elimination of death and disability benefits was used in television ads a decade ago that helped persuade former Gov. Arnold Schwarzenegger to drop his support for a measure to switch new state and local government employees to 401(k)-style plans.

In an apparent response, the new initiative says it shall not be “interpreted to modify or limit any disability benefits provided for government employees or death benefits for families.”

Reed dropped a different pension reform initiative last year after losing a court battle to change a Harris ballot summary. One of his complaints was that the summary “singles out a few specific public occupations” held in high regard by voters.

The first sentence of the initiative summary last year: “Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including teachers, nurses, and peace officers, for future work performed.”

Low’s complaint is that the occupations are not specific in the first sentence of the initiative summary this year: “Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including those working in K-12 schools, higher education, hospitals, and police protection, for future work performed.”

But the new Harris summary repeats what once again may be the main issue. Another of Reed’s complaints last year was that the summary incorrectly said the initiative eliminates the vested pension rights of current workers.

A superior court judge found that the initiative summary was not “false and misleading,” ruling that the previous Reed initiative was an attempt to overturn the “California rule.”

The rule results from a series of state court decisions widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit.

And it may be important to voters. A labor polling firm found that “California voters reject the idea of reducing or eliminating retirement benefits for current public employees,” calling it a “visceral negative response,“ the Sacramento Bee reported.

Most pension reforms are limited to new hires, which takes years to yield savings. Cutting pensions earned by current workers in the future gets immediate savings, urgently sought by reformers who say pensions are taking money needed for other programs.

Reed and the union coalition have already clashed over whether the new initiative would allow voters to reduce or eliminate pensions earned by current workers in the future, while protecting pensions already earned.

Reed has argued that the new initiative is not intended to overturn the California rule. The union coalition disagrees, pointing to a provision that gives voters the right to determine the “compensation and retirement benefits” of government employees.

The official analysis of the new initiative sent to Harris by nonpartisan Legislative Analyst Mac Taylor and Brown’s finance director, Michael Cohen, said the issue is unclear and could end up in the courts.

“Many of the measure’s provisions could be subject to a variety of legal challenges,” said their initiative analysis. “For instance, it is not clear to what extent allowing voters to use the power of initiative or referendum to determine elements of compensation for existing employees would change governmental employers’ contractual obligations under the California rule.”

The new initiative, the “Voter Empowerment Act of 2016,” would require voter approval of pensions for new state and local government employees hired on or after Jan. 1, 2019.

Some of the other provisions in the initiative require voter approval of a government employer paying more than half the cost of retirement benefits for new employees and voter approval of any pension increase for current employees.

“Costly government pension deals are devastating our public services — and this simple initiative gives voters the ability to stop sweetheart and unsustainable pension deals that politicians concoct behind closed doors with union bosses,” said the Reed-DeMaio news release.

“That’s why the politicians and union bosses oppose this initiative — and why they continue to try to mislead the public on what the initiative does. Despite their attempts to mislead, we are very confident the voters will understand the plain English requirements of this measure and overwhelmingly pass it in November 2016.”

Low’s news release said: “While the (Harris) statement accurately reflects that this Tea Party-backed measure is a back-door way of repealing constitutionally-vested and promised rights to retirement security and health care and breaks contracts negotiated through collective bargaining, it falls far short of describing the chaos and uncertainty that would occur if it were to pass, including the undermining of the financial stability of the state’s major retirement systems.

“The measure also purports to protect death and disability, but contradicts itself by repealing the very structure on which these benefits are provided for police, firefighters and other public workers. This type of extreme measure will be unacceptable to California voters and is doomed to fail.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Photo by Elektra Grey Photography

Canada Pension Invests In Malaysian Development Project; Marks Fund’s First Direct Real Estate Investment in Southeast Asia

The Canada Pension Plan Investment Board (CPPIB) this week made its first ever direct investment in Southeast Asian real estate; the fund has committed $130 million to a Malaysian real estate development project.

CPPIB is investing alongside the Pavilion Group, and the fund will have a 49 percent stake in the project.

Russia’s Private Pensions Begin Buying Up Corporate Bonds to Ease Pain of Sanctions

Last month, in a bid to stimulate its economy in the midst of Western sanctions, Russia directed its pension funds to buy up corporate bonds, some of which are considered “junk”.

Pension funds were understandably reluctant, but the buying process is now underway.

From Bloomberg:

As penalties over the conflict in Ukraine block access to capital markets, non-state pension funds are stepping in with funding for companies, according to Deputy Economy Minister Nikolay Podguzov.

The stranglehold of U.S. and European sanctions has limited borrowing abroad, forcing companies including oil producer Rosneft PJSC and Russian Railways to line up for assistance from the $75 billion Wellbeing Fund. Cue the private pension managers, who are now wielding 1.7 trillion rubles ($26 billion) in savings after recovering about a third of the industry’s assets when the government unblocked them last quarter.

[…]

Early indications are that pension flows are making some difference. Non-state pension funds bought 129 billion rubles of corporate bonds in the second quarter, the Finance Ministry said in a statement. That accounted for about a third of all corporate domestic debt sold in the period, according to Bloomberg calculations.

“At the end of the third quarter or in the fourth quarter, if the overall market situation permits, we will surely see pension funds investing in corporate bonds more actively,” Podguzov said. “The process would be more effective if it’s voluntary and mutually beneficial.”

The bonds have been performing well of late; Russian corporate bonds have returned 18 percent in 2015, according to the Bloomberg USD Emerging Market Corporate Bond Index.

Pennsylvania Gov. Wolf Considers Pension Overhaul As Budget Stalemate Drags On

Under pressure to resolve a budget stalemate that has gone on for over a month, Pennsylvania Gov. Tom Wolf – previously staunchly opposed to any pension reforms that cut benefits – may be softening his position.

He is now on board with a plan that would switch new, high-earning hires into a defined contribution plan.

How To Leave CalPERS Without Paying A Huge Fee

It may surprise cities that did not switch new hires to 401(k)-style plans because of huge CalPERS termination fees, not to mention the authors of a proposed initiative giving voters power over pensions.

But a CalPERS white paper that surfaced last week describes a “soft freeze” of pension plans that switches new hires to a 401(k)-style investment plan without paying a termination fee.

The March 2011 paper seems to contradict the current California Public Employees Retirement System position: When a pension plan is closed to new members, state law requires that the plan be terminated.

Termination triggers a fee large enough, when conservatively invested in bonds, to pay the pensions promised remaining plan members for decades into the future. The big fee is needed because employers and employees no longer pay into a terminated plan.

In the Stockton bankruptcy, Judge Christopher Klein said a termination fee that boosted the Stockton pension debt or “unfunded liability” from $370 million to $1.6 billion was a “poison pill” if the city tried to move to another pension provider.

One of the co-authors of the proposed “Voter Empowerment” pension initiative, former San Jose Mayor Chuck Reed, has first-hand experience with the big CalPERS termination fee.

The San Jose city council considered switching new council members to a 401(k)-style plan three years ago. But the council made no change after learning the CalPERS termination fee would be $5 million, far above the $900,000 debt or unfunded liability.

Villa Park, with another small plan (30 members, seven active), asked for an estimate to publicize high termination fees. The CalPERS estimate this year was $3.7 million. Canyon Lake and Pacific Grove also balked at high termination fees.

So, why did the CalPERS white paper issued four years ago describe a “soft freeze” that would allow switching new hires to a 401(k)-style plan without terminating the pension plan and triggering a big fee?

A CalPERS spokeswoman said the white paper assumed that the state law covering public pensions, the Public Employees Retirement Law, would be changed to allow a soft freeze without terminating the pension plan.

“The PERL could be changed to permit the soft freeze that is contemplated in the initiative, but the current wording of the initiative does not clarify this,” Amy Morgan, the CalPERS spokeswoman, said via email. “It is this lack of clarity in the initiative that leads to the uncertainty about the consequences of the initiative.”

Among other things, the initiative sponsored by a bipartisan group led by Reed and former San Diego Councilman Carl De Maio requires voter approval of pensions for new hires, government paying more than half of total retirement costs, and termination fees.

The white paper issued in March 2011 was followed in August of that year by a major CalPERS policy change. The investment earnings forecast used to set the termination fee was dropped from 7.75 percent to 3.98 percent, sharply increasing the fee.

The change from the optimistic forecast for the main CalPERS fund, with its diversified portfolio of stocks and other investments, to a less risky and more predictable bond-based forecast was driven by worry that a large plan might be terminated.

CalPERS had been hit by huge recession-era investment losses, about $100 billion, and needed large employer rate increases. There was speculation about possible city bankruptcies, and Stockton and San Bernardino filed the following year.

But no large pension plan has been terminated. The pooled CalPERS fund that pays for the pensions of members in terminated plans, which receive no payments from employers or employees, has a large surplus.

The Terminated Agency Pool had 249 percent of the assets (market value $194 million) needed to pay promised pensions as of June 30, 2013, the latest report said. Annual payments of $4.6 million were going to 684 retirees and beneficiaries of 90 terminated plans.

How important is the termination fee?

It’s the one way, outside of bankruptcy, that the pensions of current workers can be cut. If a terminated plan lacks the assets to cover promised pensions, the CalPERS board has the power under state law to cut the pensions to the level covered by the assets.

The white paper on plan closure was cited by the CalPERS chief executive officer, Anne Stausboll, in a reponse to a request for an analysis of the proposed initiative from the Assembly public retirement committee chairman, Rob Bonta, D-Alameda.

In addition to creating administrative challenges and threatening tax-exempt status and death and disability coverage, Stausboll said, the initiative would abolish the “California Rule” for new hires and possibly current employees.

A series of state court decisions known as the “California rule” are believed to mean that the pension promised on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.

The CalPERS white paper said a “hard freeze” stops future pension earnings for current employees, presumably prohibited by the California rule. A “soft freeze” only closes the pension plan to new employees.

“When a plan administrator closes a defined benefit (pension) plan, often the administrator opens a fixed-rate defined contribution (401k-style) plan,” said the white paper. “The defined benefit plan must be administered until the last participant quits working, retires and dies.”

The white paper lists a number of reasons why staying with pensions is preferable, including lower costs from administering only one plan instead of two plans if new employees are switched to a 401(k)-style plan. A termination fee is not mentioned.

The other large state pension system, the California State Teachers Retirement System, has not had to deal with plan terminations. It has only one plan covering 1,700 employers, mainly school districts but also other education agencies.

In an early analysis of the initiative sent to stakeholders, CalSTRS sees a number of administrative, funding and other problems. The vote on whether to give new hires pensions is assumed to be by each school district or employer jurisdiction, not statewide.

Depending on the vote outcome, CalSTRS said it could be required to administer multiple plans with “inconsistent eligibility requirements, vesting rules, benefit formulas, contribution rates, retirement ages, and beneficiary and survivorship allowances.”

Attorney General Kamala Harris is expected to issue a title and summary for the initiative by tomorrow (Aug. 11). Two previous pension initiatives were dropped after the sponsors said Harris gave them inaccurate and misleading summaries, making voter approval unlikely.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Illinois Supreme Court Expedites Hearing On Chicago Pension Reforms

Less than a month ago, a judge declared Chicago’s pension reforms unconstitutional. The reform law mandated higher contributions for current employees and reduced cost-of-living adjustments for retirees of two city pension systems.

Now, the Illinois Supreme Court has agreed to take up Chicago’s appeal of the lower court’s decision – and a ruling on that appeal is going to come quick.

From the Chicago Tribune:

The Illinois Supreme Court on Thursday agreed to quickly consider an appeal of a lower court ruling that struck down pension fund changes Mayor Rahm Emanuel engineered to lower taxpayer costs but also hit current and retired city workers in the pocketbook.

In a brief order, the court agreed to a sped-up briefing cycle that would lead to oral arguments in November — a schedule city attorneys hope leads to a final decision before the year is out.

[…]

Although union representatives and lawyers for retired workers have urged the city to drop the appeal, Emanuel has defended it, saying city pension changes “will stand the test of time.”

If the appeal fails, the city eventually would have to come up with hundreds of millions of dollars more each year to restore financial soundness to two pension funds for city workers and laborers. Those workers, however, would pay less into the fund, and retired workers would not see their benefits reduced.

The rationale for the lower court’s overturning of the law was that the reforms “diminished or impaired” the benefits of Chicago retirees, which is forbidden by the state’s Constitution.

Photo by bitsorf via Flickr CC License

How Have Asset Allocations Changed Since 1995 in the World’s Largest Pension Markets?

How have asset allocations changed over the last 20 years in the world’s largest pension markets? Towers Watson recently tackled that question in their 2015 Global Pensions Asset Study.

The above graphic displays several broad, interesting trends. For instance, alternative assets’ presence in pension portfolios has quadrupled since 1995, rising from a 5 percent to 25 percent average allocation.

But the average pension fund portfolio still has a higher percentage of equities and bonds than alternatives — except in Australia and the United States, where alternatives beat out bonds.

Get the study here.

Beware of Small Hedge Funds?

Editor’s note: This post from Pension Pulse isn’t about pensions; but since hedge funds and institutional investing are so closely intertwined, we’ve decided to post this interesting piece regardless.

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Mark Fahey of CNBC reports, Small hedge funds aren’t as great as they say:

You’ve probably heard the conventional wisdom: Smaller, younger hedge funds are more nimble, and tend to bring better returns than their bulky, aging cousins.

But youth and size are not the same thing. About 85 percent of young funds—under 2 years old—manage less than $250 million in assets, but only about 14 percent of all small funds are young. That’s down from 42 percent of all small funds about a decade ago.

That may sound like simple semantics, but it matters because “young” funds and “small” funds don’t behave the same when it comes to returns. While young funds do, in fact, tend to outperform older funds, small funds haven’t been doing as well in recent years.

Looking at Sharpe ratios, a measure of risk-adjusted return, small hedge funds have been underperforming medium-sized funds for the last six years, a stark difference from strong returns before the financial downturn, according to an analysis of thousands of reporting funds by eVestment Alternatives Research (click on image):

“Everyone thinks that small funds perform well, but we see that disappearing over time,” said Peter Laurelli, vice president of research at eVestment.

What changed? Both the market environment and the strategy composition of the different categories shifted over that time, said Laurelli. Most of the early outperformance from the smaller funds came from emerging market strategies, where smaller funds were more likely to be focused on specific countries and to operate in more volatile environments. Later, small funds also outperformed in managed futures and macro strategies, he said.

“The post-financial crisis environment has seen each of these groups go through periods of difficulty, driven by their respective market environments,” said Laurelli.

Investors seem to be catching on. The proportion of small hedge funds has been falling, and investors seem to be favoring medium and large funds. New funds also tend to be larger, with the percentage of young funds that are medium-sized growing from less than 8 percent before the financial crisis to about 13 percent in 2013.

As for young hedge funds, they tend to have healthy returns because by definition they have a timing advantage—funds tend to be formed at times that are advantageous for their specific strategies. For example, a crop of successful securitized credit strategy funds was founded after the recession in response to opportunities in that area, and while all types of funds saw good returns for that type of strategy at that time, those returns will raise the “young fund” category because they were created at that time.

The biggest funds are big for a reason

The 30 largest, most prominent hedge funds at the end of 2014 performed better than any group aside from the average young fund. Last year, those funds returned a little more than 6 percent—missing the young funds by just 5 basis points.

The biggest funds together manage nearly $450 billion, yet was one of the only groups—again, along with young funds—to end in the black in 2011. Even in 2008, the largest funds limited their losses to an average of 0.65 percent, despite the added difficulty of moving their much larger investments.

About 10 of those 30 largest funds use macro or managed futures strategies, that led to healthy returns around the time of the financial crisis. Eight used credit strategies, which were strong after the crisis. Others were multistrategy or distressed and special situation investing, said Laurelli. Few are pure equity products, so the losses of 2008 and 2011 harmed the largest group the least.

And of course, big funds don’t usually get big by being bad at what they do.

“Prominent funds become prominent because their performance warrants growth of assets,” said Laurelli. “Performance is a mix of opportunity, the ability to attract and pay the talent to exploit opportunity, and the scale needed to profitably exploit opportunities.”

Return isn’t everything

While some small funds have struggled to raise capital and gone bust, some have had solid returns and will continue to attract interest, said Amy Bensted, head of hedge fund products at Preqin, an alternative assets intelligence firm.

Preqin classifies funds with $100 million or less in assets as small, but the company sees similar results to eVestment, said Bensted. Preqin hasn’t looked specifically at the top 30, but the firm generally finds that it’s the middle range—funds with $100 million to $500 million in assets—that perform the best in returns.

But there is more to hedge fund investing than simply looking at average returns or risk-adjusted returns, she said.

“It’s not just about returns and long-term gains, it’s more about the types of investors who may be interested in these funds,” said Bensted, “Maybe they’re looking for a true hedge fund with a unique strategy, or they might have lower fees.”

It’s difficult to categorize funds or judge them on one metric alone. Size and age are just two of many ways to break apart the market.

“Every one is unique, and size is part of that uniqueness,” said Bensted. “It’s an interesting way to look at it, and a good way to frame the market.”

Stephen Weiss, managing partner for Short Hills Capital Partners and a CNBC contributor, said that his “fund of funds” strongly prefers smaller funds that are one or two years old and run by managers with a “strong pedigree.”

“However, it takes a lot more work to find these funds,” said Weiss. “Larger funds have more assets because endowments and pensions—institutional investors—have a bogie of 5 to 8 percent return and a self-imposed mandate to not lose their jobs by recommending a non-brand name fund.”

Smaller, younger managers are more driven by returns because they haven’t made their fortunes yet, said Weiss. Categorical returns are averages, so if an investor can pick the right small funds, they can still pay off.

The article above delves deeply into a topic that I’ve covered over the years. My own thinking has evolved on the subject as I’m ever more convinced this is a brutal environment for all hedge funds and only the strongest will survive.

This is why I keep warning Soros wannabes to really rethink their plan to start a hedge fund, unless of course they are his protégé, in which case the chances of success are infinitely higher.

What has changed? First and foremost, the institutionalization of hedge funds has fundamentally altered the landscape and there are reasons why the biggest hedge funds keep growing bigger:

The biggest hedge funds are typically trading in highly scalable, liquid strategies and are a better fit for large global pension and sovereign wealth funds that prefer allocating to a few large “brand name” hedge funds than to many small hedge funds. It’s not just about reputation or career risk, it’s also about allocating human resources to perform due diligence on all these smaller funds and monitor them carefully.
The biggest hedge funds have the resources to hire the very best investment, back office and middle office personnel. Not only do they attract top talent away from banks and smaller hedge funds but also from large, rival large hedge funds. More importantly, they’re able to hire top compliance and risk officers, which helps them pass the due diligence from large institutions.

Having said this, there are pros and cons to investing with the ‘biggest and the best,” especially in Hedgeland where useless consultants typically recommend the hottest hedge funds to their clueless clients, even though these are the funds they should be avoiding at all cost.

What are the other problems with the biggest hedge funds? I outline a few below:

The big hedge funds attract billions in assets and collect 1.5% to 2% in management fee no matter how well or how poorly they perform. This incentivizes them to focus more on asset gathering and less on performance. Collecting a 2% management fee is fine when you’re starting off a hedge fund; not so much when you pass the $10 billion mark in AUM (and some think even less than that).
Large hedge funds are typically led by larger-than-life personalities who don’t give even their large investors the time of day. You’re never going to get to meet Ray Dalio, Ken Griffin, or many other big hedge fund hot shots when conducting your on-site visits (I was lucky to meet Ray Dalio because I was accompanied by the president of PSP at the time and insisted on it).
This means you won’t gain the same rapport and knowledge leverage that you can gain by investing in a smaller manager who is more open to cultivating a deeper relationship with a long term investor.

But smaller hedge funds are still courted by the top funds of funds that are more focused on performance (they have to be to charge that extra layer of fees) and are looking to grow their assets and find the next Dalio, Griffin, Soros, Tepper, etc.

If I was a large sovereign wealth fund or pension fund, I would definitely give a $500 million, $1 or even $2 billion mandate to one or a few well established fund of funds like Blackstone, PAAMCO, or even someone more specialized in a specific strategy or sector, to fund emerging managers (separate account where I am the only investor). I would negotiate hard on fees but be very fair as you want to see emerging talent succeed and thrive in order to eventually shift them into your more established external managers’ portfolio.

Still, there are risks to this strategy. Quebec’s absolute return fund which was established to help emerging managers here ended up being a total flop. To be brutally frank, most hedge funds in Quebec and the rest of Canada stink and would never be able to compete with funds in New York, London or Chicago (to be fair, the hedge fund ecosystem stinks in Quebec and is marginally better in the rest of Canada. Moreover, overzealous regulators here make it virtually impossible to open a hedge fund, which is another story you don’t want me to get started on).

It’s also a tough environment for top established American hedge funds, which makes it even harder to succeed in these brutal Risk On/ Risk Off markets where deflation and China fears loom large. The rout in commodities has hit a lot of big players very hard, including ‘God-trader’ Andy Hall whose fund, Astenbeck Capital Management, lost $500M in the month of July (see below). Also, not surprisingly, China focused hedge funds have been decimated.

Do me a favor, please go back to read an older comment of mine on the rise and fall of hedge fund titans as well as a more recent comment on alpha, beta and beyond. Also go read my comment on Ron Mock’s harsh hedge fund lessons to gain more insights in how to properly invest in hedge funds.

Photo by www.SeniorLiving.Org

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