Tag: hedge fund investment

San Francisco Pension Postpones Hedge Fund Vote

Golden Gate Bridge

The San Francisco Employees’ Retirement System is delaying a vote on a new proposal to begin investing in hedge funds.

The scaled-down proposal calls for investing a maximum of 5 percent of assets in hedge funds. Originally, the pension fund was considering a 15 percent allocation.

The vote will be held in February.

More from SF Gate:

The board of the San Francisco Employees’ Retirement System voted Wednesday to postpone a decision on investing in hedge funds until February to give staff time to research an alternative proposal that was submitted Tuesday night.

The alternative calls for investing just 5 percent of the fund’s $20 billion in assets in hedge funds and — in a new twist — putting 3 percent in Bay Area real estate.

The system’s investment staff had recommended sinking $3 billion — or 15 percent of the fund’s $20 billion in assets — in hedge funds as part of an asset-allocation overhaul. The system, which manages pension money for about 50,000 active and retired city workers, has never invested in hedge funds. The goals of the plan included reducing volatility, improving performance in down markets and enhancing diversification.

Staff also would have supported investing 10 or 12 percent in hedge funds, but didn’t want to go below that. “Without 10 percent it wouldn’t be a meaningful hedge against a down market. We felt that was an absolute minimum,” Jay Huish, the system’s executive director, said in an interview last month.

But some members of the board were reluctant to make that big a commitment to hedge funds, especially after the giant California Employees Retirement System announced Sept. 15 that it will exit all hedge funds over the next year “as part of an ongoing effort to reduce complexity and costs in its investment program.” At that time, CalPERS had $4 billion or 1.4 percent of its assets in hedge funds. San Francisco’s system would have been one of the first public pension funds to make a major decision on hedge funds since then.

At Tuesday’s meeting, about 30 active and retired city employees begged the board not to invest 15 percent in hedge funds. Among their arguments: that hedge funds are too risky, illiquid, not transparent, charge excessive fees and may amplify systemic risks in the financial system.

Only one spoke in favor of it: Mike Hebel, who represents the San Francisco Police Officers Association. He said the system needs an asset allocation makeover to prevent another hit like it took in the 2008-09 market crash and hedge funds should be part of that. The value of its investments fell by about $6.3 billion or 36 percent during that period.

The San Francisco Employees’ Retirement System manages $20 billion in assets.

 

Photo by ilirjan rrumbullaku via Flickr CC License

San Francisco Pension To Consider Smaller Foray Into Hedge Funds

Golden Gate Bridge

The San Francisco Employees’ Retirement System has spent the better part of 6 months weighing whether to dive into hedge funds for the first time.

The fund was originally considering a plan to invest up to 15 percent of assets – or $3 billion – in hedge funds. But the figure was too high for many board members, and the vote was tabled numerous times.

Now, the board is considering a proposal that would allow the fund to invest up to 3 percent of assets in hedge funds – a much smaller allocation that may be more palatable to board members.

From Bloomberg:

The president of the San Francisco Employees’ Retirement System board has asked advisers to look at a hedge fund investment of zero or 3 percent, less than the 15 percent proposed by the pension’s staff.

The board will meet today in San Francisco to consider the proposals, which are part of a broader effort to recalibrate the fund’s asset allocation. The updated figures were in a letter from Angeles Investment Advisors.

“The VM mixes have higher volatility,” Leslie Kautz and Allen Yeh wrote in a Nov. 25 memo to Victor Makras providing modeling on several mixes that they said he specified.

[…]

The hedge fund proposal stems from a June meeting when the San Francisco staff recommended changes to the fund’s asset allocation and the board voted to take 90 days to study options.

The staff recommended a 15 percent hedge-fund allocation, citing good returns, low volatility and very good risk-adjusted returns, according to a memo today to the board from William Coaker, the fund’s chief investment officer.

“Hedge funds provide good protection when stocks decline,” Coaker said. “Since 1990, they have lost only one-fourth the amount stocks have lost in market downturns.”

The San Francisco Employees’ Retirement System manages $20 billion in assets, none of which are allocated to hedge funds.

 

Photo by ilirjan rrumbullaku via Flickr CC License

Rhode Island Pension Investment Board Reviews Hedge Fund In Closed-Door Meeting

Rhode Island flag and mapRhode Island governor-elect Gina Raimondo and the state Investment Commission held a closed-door meeting last week to review a particular hedge fund, Mason Capital, in which $61.7 million of pension money is currently invested.

The exact reason for the meeting, and what was said during, is unknown because the session was exempt from the state’s Open Meetings Law.

The minutes of the meeting are sealed to “protect the interest of the state’s pension fund”, according to a Raimondo spokesman,

More from the Providence Journal:

Asked to explain [the meeting], Raimondo spokesman Ashley Gingerella-O’Shea drew attention to the exemption that the state’s Open Meetings Law provides for any “matter related to the question of the investment of public funds where the premature disclosure would adversely affect the public interest.”

The state has had an investment in Mason Capital since January 2012 that has increased in value by an average of 1.02 percent per year in the nearly three years since, according to an Oct. 31 report to the investment commission.

It was one of the hedge funds in which Raimondo, a former venture capitalist, invested an overall $1.176 billion in a controversial shift in strategy that figured prominently during her heated primary and general election campaigns. Her opponents keyed their criticism to the sharp increase in state-paid investment fees since she took office.

When pressed, Gingerella-O’Shea sent a further statement on Monday that said the investment commission “reviewed the calendar year-to-date performance” of all of the state’s hedge fund investments during the open portion of last Wednesday’s meeting.

[…]

But a review of the last online Investment Commission report indicates the value of the state’s investment in Mason Capital dropped by about $4.7 million during October, from $66.4 million to $61,751,634.

While the market value of some of the state’s other “global equity hedge funds” dropped in October, none dropped this much.

The closed portion of the meeting was only a segment of a larger, open-to-the-public discussion on the year-to-date performance of the pension system’s hedge fund investments.

The Mason Capital fund returned around 1.02 percent annually over the last three years. Meanwhile, the state pension system’s hedge fund portfolio has averaged returned of 6.9 percent over the same time period.

South Carolina Pension Seeks Smaller Hedge Fund Managers

South Carolina flag

The South Carolina Public Employee Benefit Authority (PEBA) allocates a large portion of its assets towards hedge funds – 17 percent, as of June 30.

But PEBA is looking for a change. It isn’t considering moving away from hedge funds, but it is looking at different kinds of hedge funds. Namely: smaller ones.

From Bloomberg Briefs:

South Carolina’s pension is interested in allocating to smaller hedge fund managers to enhance diversification and capture increased returns as it reduces holdings in larger funds, according to state treasurer Curtis Loftis.

The $30 billion pension had 14 investments in “strategic partnership funds” of $1 billion or more at the start of this year, of which it has “unwound about half,” Loftis said in a speech at the Alternative Asset Summit in Las Vegas last month. It is “very interested in emerging managers” to help with this “fear of non-diversification, and to enhance returns” he said in the Oct. 28 speech. The pension has already made “several or so investments of $50 million or less the last few of months,” he said. This includes a commitment of $25 million to $50 million last month to a small manager that Loftis declined to identify.

“I love alternative investments. I love Wall Street. I don’t mind paying fees,” Loftis said in 2013. “But I want returns.” The pension last year had investment fees and expenses of 1.59 percent of assets, compared to a national average of 0.57 percent, according to a presentation on its website.

[…]

The state treasurer suggested emerging hedge funds to “come show up” at public meetings of public pension plans, including the South Carolina Investment Commission. “If I were an emerging manager and I wanted to understand how public pension plans work, I would attend the meetings, shake hands and pass out cards.”

The move is interesting because there is data out there suggesting pension funds can get the best returns by investing with newer, smaller hedge funds.

Dr. Linus Wilson writes:

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.

Dr. Wilson believes pension funds are ignoring data that suggests newer, smaller managers perform better than the older, larger hedge funds that pension funds typically prefer

Read Dr. Wilson’s entire piece here.

Video: New York City Comptroller Talks About Push By Pension Funds For More Control of Corporate Boardrooms and City’s Hedge Fund Allocation

Here’s an interview with New York City Comptroller Scott Stringer. Stringer is trustee of the City’s five pension funds.

During the course of the interview, Stringer talks about his push for pension funds to have more control over corporate boardrooms. He also defends the city pension system’s hedge fund allocations.

Lowenstein: Do Pension Fund Make Investing Too Complex?

maze

Former New York Times financial writer Roger Lowenstein wonders in his new Fortune column whether pension investments have become too complex.

Lowenstein’s thesis:

Pricey consultants have convinced many pension funds to pile into private equity, real estate and hedge funds, which don’t necessarily promise higher returns or long-term investing.

[…]

[Pension funds] have assembled portfolios that are way too complex, way too dependent on supposedly sophisticated (and high fee) investment vehicles. They have chased what is fashionable, they have overly diversified, and they have abandoned what should be their true calling: patient long-term investing in American corporations.

[…]

It’s true that the stock market doesn’t always go up. But a long-term investor shouldn’t be wary of volatility. Over the long term, American stocks do go up. And state pension systems should be the ultimate long-term investors; their horizon is effectively forever.

Lower volatility helps fund managers; they don’t like having to explain what happened in a bad year. But it is not good for their constituents. The Iowa system has trailed the Wilshire stock index over 10 years—also over five years, three years, and one year. Over time, that translates to higher expenses for employees or for Iowa taxpayers. And Iowa is typical of public funds generally.

[…]

Many hedge funds trumpet their ability to dampen volatility. Pension funds should not be in them. From 2009 to 2013, a weighted index of hedge funds earned 8% a year, according to Mark Williams of Boston University. The return on the S&P 500 was more than twice as much, and a blended 60/40 S&P and bond fund earned 14%. Granted, a small minority of hedge funds consistently beat the index. But most public pensions will not be in such superlative funds.

Lowenstein on private equity:

Private equity remains the rage. However, private equity is hugely problematic. Those confidential fees are often excessive—with firms exacting multiple layers of fees on the same investment.

Moreover, there is no reliable gauge of returns. Private equity firms report “internal rates of return.” These do not take into account money that investors commit and yet is not invested. “The returns are misleading,” says Frederick Rowe, vice chairman of the Employee Retirement System of Texas. “The professionals I talk to consider the use of IRRs deceptive. What they want to know is, ‘How much did I commit and how much did I get back?’”

Since no public market for private equity stakes exists, annual performance is simply an estimate. Not surprisingly, estimates are not as volatile as stock market prices. But the underlying assets are equivalent. A cable system or a supermarket chain does not become more volatile by virtue of its form of ownership.

The fact that reported private equity results are less volatile pleases fund managers. But the juice in private equity comes from its enormous leverage. Pension managers would be more honest if they simply borrowed money and bet on the S&P—and they would avoid the fees. And if high leverage is inappropriate for a public fund, it is no less inappropriate just because KKR is doing it.

Lowenstein ends the column with a call for pension funds to renew their focus on “long-term goals”:

With their close ties to Wall Street, pension managers tend to be steeped in the arcane culture of the market. The web site for the Teacher Retirement System of Texas refers to its “headlight system” of “portfolio alerts” and the outlook for the U.S. Federal Reserve and China.

Managers who think in such episodic terms tend to be traders, not investors. This subverts the long-term goals of retirees.

The focus on the short and medium term squanders what a pension fund’s true advantage is. You may not have thought that public funds had an advantage, but they wield more than $3 trillion and have the freedom to invest for the very long term.

Better than chase the latest “alternative,” pensions could become meaningful stewards of corporate governance—active monitors of America’s public companies. A few fund managers, including Scott Stringer, the New York City comptroller, who oversees five big funds, are moving in this direction, seeking board roles for their funds. More should do so, but that will require an ongoing commitment. It will require, in other words, that pension funds stop acting like turnstile traders and fad followers, and that they start behaving like investors.

Read the entire column here.

 

Photo by Victoria Pickering via Flickr CC License

San Francisco Pension Not Expected to Approve Hedge Fund Proposal, But Alternate Plan Could Pass

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Trustees of the San Francisco Employees’ Retirement System will vote sometime in the next few weeks on a proposal to invest up to 15 percent of assets – or $3 billion – in hedge funds.

The vote has been proposed and tabled nearly half a dozen times since May.

According to reporting by Pensions & Investments, the proposal isn’t expected to pass a vote – although a toned-down version, where hedge fund investments are capped at 5 percent of assets, has a better chance at passing.

From Pensions & Investments:

The board of the San Francisco City & County Employees’ Retirement System is expected to reject Chief Investment Officer William Coaker’s plan for a 15% allocation to hedge funds at a meeting in the next several weeks and instead limit hedge funds to no more than 5% of the portfolio, sources say.

The board had been scheduled to vote on the hedge fund allocation at a special meeting scheduled for Wednesday.

Board President Victor Makras said in an interview that a new special meeting will be held in the next few weeks. He said he will schedule the meeting as soon as he can poll members for a suitable date.

He said the Nov. 5 meeting was canceled because several board members were traveling out of the country.

The board is also expected, as part of the hedge fund vote, to bar or severely limit the use of leverage by hedge fund managers, a common tactic used by such mangers to increase returns.

Mr. Coaker’s plan would shift assets from fixed income and equities to create the new hedge fund allocation.

If the “15 percent” plan passes, the following allocation changes would occur elsewhere in the fund’s portfolio, according to SFGate:

U.S. and foreign stocks would drop to 35 percent from 47 percent of assets. Bonds and other fixed-income would fall to 15 percent from 25 percent. Real estate would rise to 17 percent from 12 percent. Private equity would rise to 18 percent from 16 percent. And hedge funds would go to 15 percent from zero.

The San Francisco Employees’ Retirement System currently does not invest in hedge funds. It manages $20 billion in assets.

San Francisco Pension To Vote Again On Hedge Funds

Golden Gate Bridge

The San Francisco Employees’ Retirement System is once again weighing whether to begin investing in hedge funds.

Last Spring, the fund formulated a plan to invest up to 15 percent of its assets, or $3 billion, in hedge funds. But the vote has been tabled three times since then.

This week, the fund will vote again on the issue.

From SFGate.com:

The board of the San Francisco Employees’ Retirement System is scheduled to vote Wednesday on a controversial proposal to invest $3 billion — 15 percent of its assets — in hedge funds. The system, which manages $20 billion in pension money on behalf of about 50,000 active and former city employees, has no hedge funds today.

[…]

A 15 percent allocation would definitely have an impact on the San Francisco pension fund. William Coaker Jr., who joined the system Jan. 30 as chief investment officer, wants to put 15 percent of its assets in hedge funds as a way to protect against a market correction. But some board members and pensioners see them as too expensive and risky.

[…]

Earlier this year Coaker and his staff, along with outside consultant Leslie Kautz of Angeles Investment Advisors, recommended investing 15 percent of the system’s assets in hedge funds as part of a realignment of its portfolio. The goal was to “reduce volatility in investment returns, improve performance in down markets, enhance diversification of our plan assets, increase the flexibility of the investment strategy, and to increase alpha (excess returns),” according to minutes of the June 18 meeting. Coaker did not return phone calls.

A vote on the measure was scheduled for October but shortly before the meeting, board President Victor Makras learned that Kautz’ firm has a fund of hedge funds registered in the Cayman Islands. “That was a material fact,” Makras said. “I continued the item and instructed the consultant to disclose that to my satisfaction.”

If the fund does vote to invest in hedge funds, there would be the following allocation changes, according to SFGate:

U.S. and foreign stocks would drop to 35 percent from 47 percent of assets. Bonds and other fixed-income would fall to 15 percent from 25 percent. Real estate would rise to 17 percent from 12 percent. Private equity would rise to 18 percent from 16 percent. And hedge funds would go to 15 percent from zero.

The San Francisco Employees’ Retirement System manages $20 billion in assets.

Chart: The Rise of Hedge Funds In Pension Portfolios

hedge funds chartIn recent years, hedge funds have solidified themselves as a big part of pension portfolios by two measures:

1) More pension funds than ever are investing in hedge funds

2) Those pensions are allocating more money towards hedge funds than ever before

That bears itself out in the above graphic, and this next one:

hedge fund statsA recent Preqin report had this to say about the numbers:

“There are more US public pension funds than ever before allocating capital to hedge funds, and these investors are investing the most they ever have in the asset class. Public pension funds have increasingly recognized the value of hedge funds as part of a diversified portfolio, and although CalPERS’ withdrawal from the asset class will spark some investors to look more closely at their current allocation model, the importance of hedge funds as a source of risk-adjusted returns for these investors is likely to continue to prove attractive for US retirement schemes.

Preqin’s recent research highlights that investors are not using hedge funds to produce outsized returns, but instead to produce uncorrelated, risk-adjusted returns. Over short and longer time frames, hedge funds have in general met investor needs for risk-adjusted returns. However 2014 has been a period of relatively turbulent returns when looking at Preqin’s monthly benchmarks; in times like this, investor calls for changes in fee structures and better alignment of interests become more vocal, and this clearly has had an impact on CalPERS’ decision.”

 

Chart Credit: Preqin

Denmark Ramps Up Oversight Of Alternative Investments in Pension Systems

Danish flag

The entity that regulates Denmark’s financial system has announced plans to tighten oversight of alternative investments made by pension funds.

The move comes as regulators in the Financial Supervisory Authority have reported an uptick in risk, illiquidity and opacity in pension investments. From Bloomberg:

The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report.

The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016. The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions.

“The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.

[…]

Danish funds and insurers have overestimated the value of alternative investments they made while failing to adequately account for the risks, the FSA said in a February report.

Pension funds held 152 billion kroner ($26 billion) at the end of 2012, or about 7 percent of their balance sheets, in equity stakes and other assets sold on markets the FSA characterized as illiquid, opaque and thin. The agency said they need to account better for those risks and ordered reports from the third quarter. PFA, Denmark’s biggest commercial pension fund, said today it invested in a shopping mall in western Denmark as part of a strategy to increase its presence in retail properties.

Denmark’s pension systems hold $500 billion in assets, collectively.

 

Photo: “Dannebrog”. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons


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