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Fiduciary Capitalism, Long-Term Thinking and the Future of Finance

John Rogers, CFA, penned a thoughtful article in a recent issue of the Financial Analysts Journal regarding the future of finance – and how pension funds and other institutional investors could usher in a new era of capitalism.

From the article, titled “A New Era of Fiduciary Capitalism? Let’s Hope So”:

From my perspective, a new era of capitalism is emerging out of the fog. What I define as fiduciary capitalism is gathering strength and needs to become the future of finance. An era of fiduciary capitalism would be one in which long-term-oriented institutional investors shape behavior in the financial markets and the broader economy. In fiduciary capitalism, the dominant players in capital formation are institutional asset owners; these investors are legally bound to a duty of care and loyalty and must place the needs of their beneficiaries above all other considerations. The main players in this group are pension funds, endowments, foundations, and sovereign wealth funds.

Fiduciary capitalism has several attractive traits. It encourages long-term thinking. As “universal owners,” fiduciaries foster a deeper engagement with companies’ management teams and public policymakers on governance and strategy. In textbook terms, they seek to minimize negative externalities and reward positive ones. Because reducing costs is easier than generating alpha, we can expect continued pressure on financial intermediaries to reduce costs. To be sure, there are considerable gaps to bridge between today’s landscape and fiduciary capitalism. Transparency and disclosure, governance of fiduciaries, agency issues, and accountability are all areas that need more work.

On barrier in the way of fiduciary capitalism: lack of transparency. From the article:

Too many institutional investors are secretive and do not disclose enough about their activities. Their beneficial owners (including voters, in the case of sovereign funds) need more information to make reasonable judgments about their operations. Similarly, far more transparency is needed in the true costs of running these pools of assets. Investment management fees and other expenses often go unreported. Too much time and energy is spent comparing returns with market benchmarks, and not enough is spent defining and comparing the organizations’ performances against their liabilities—or against adequacy ratios.

Pension governance itself needs to be improved. As Ranji Nagaswami, former chief investment adviser to New York City’s $140 billion employee pension funds, has observed, public pension trustees are often ill equipped to govern platforms that are effectively complex asset management organizations. Compensation remains a complicated issue. In the public sector, paying for great pension staffers ought to be at least as important as a winning record on the playing field, yet in 27 of the 50 US states, the highest-paid public employee is the head coach of a college football team.

Rogers concludes:

The future of finance needs to be less about leverage, financial engineering, and stratospheric bonuses and more about efficiently and cleanly connecting capital with ideas, long-term investing for the good of society, and delivering on promises to future generations. In the public policy arena, governments that promote long-term savings, reduce taxes on long-term ownership, and require transparency and good fiduciary governance can help hasten this welcome change in our financial markets.

The era of finance capitalism wasn’t all bad, and an era of fiduciary capitalism wouldn’t be all good. In a time when leadership in finance is desperately lacking, fiduciaries have the potential to reconnect financial services with the society they serve. Let’s hope it’s not too late.

Read the entire article, which is free to view, here.

Interview: Hedge Fund Mogul Talks CalPERS’ Pullout, Manager Selection and Justifying Fees

Forbes released an interview Thursday morning with Anthony Scaramucci, founder and co-managing partner of alternatives investment firm SkyBridge Capital.

The interview touched on CalPERS’ hedge fund exit, how the pension fund picked the wrong managers and how to pick the right ones. Later, Scaramucci touched on justifying the industry’s fee structure.

On CalPERS’ pullout:

Steve Forbes: Thank you, Anthony, for joining us. To begin, in terms of hedge funds, as you know the overall performance of hedge funds has lagged the market in recent years. CalPERS, the largest hedge fund in the country, made headlines by saying, “We’re getting out of this.” What is that a sign of? Either the hedge fund industry is going away and is only sustained because there’s nothing else around that’s suppressing interest rates or is this a sign of the bottom? When a big one gets out does that mean this is the time to get in?

Anthony Scaramucci: Well, so, the question’s is it going to get easier or harder from here? That was a good start, Steve. But the short answer is that there’s a lot of reasons why the industry’s underperformed. The main one has to do with something you often talk about, which is Federal Reserve monetary policy.

So, the policy since March of 2009 has been to hammer down the rates, artificially stimulate the market. This makes it impossible for about 40% of the hedge fund managers to perform. If you look at the overall hedge fund manager index, 40% of it is in long-short managers.

And so if you’re long something, you’re doing great in this market. But I’ve got to tell you something, Steve. If you’re short something, even if you’re right on the security analytics, you’re going to be wrong on the momentum of the market. And so what’s happened to the long-short managers is the longs are going up, the shorts are going up, and they have this little tight spread. They’re making 3%, 4%, 5% when the market’s rip roaring and the media is writing all these nasty articles about them.

But there are places to make money. There’s structured credit, activism. There’s a whole host of distressed guys that have done well over the last six years. But I think the media has been justified in pointing out that, in general, the hedge funds have not done well.

The CalPERS thing is a little different. They only had 1.5% of their assets there. Joe Dear, who was a legendary guy at CalPERS, when he passed I think it became one of those things where they weren’t going to get bigger for political reasons, and so they decided to get way smaller. But I don’t think it’s a death knell of the industry yet. In fact, I’ll make a prediction that we’ll look back two or three years from now and say that they caught the bottom of the hedge fund performance market.

On manager selection:

Forbes: You said that they [CalPERS] picked the wrong hedge fund managers.

Scaramucci: Yes.
Forbes: How do you pick the right ones? Because it’s fine to say, “Well, if you look at the top 10%, you would have done nifty.”

Scaramucci: Yes.

Forbes: But, like, the top 10% of stocks, how do you do it on a consistent basis?

Scaramucci: Well, okay. So, not to use a baseball analogy, but just think of it this way.

Forbes: You can, I’m a fan.

Scaramucci: Okay. So, well then you’ll probably know this from the Bill James Abstracts. Sixty percent of the everyday players are batting .260 or below, yet every midsummer classic we see 40 guys on the field that are Hall of Famers or the top of what they do. And I think that’s indicative of most industries, frankly, whether it’s the media, the hedge fund industry or, you know, political landscape and so forth. And so there are certain metrics that you can use to identify who’s going to do well. But the number one metric is the macro environment.

If you tell us what the economic dashboard looks like over the next 12 to 18 months, we have pretty high capabilities on the prediction side of what sectors are going to do well. As an example, 2009, if you and I were having this conversation, I would have told you that the residential mortgage-backed security market was going to do very, very well. Those assets were distressed. They were technically oversold by the large institutions. The Federal Reserve monetary policy at that time with Helicopter Ben bringing things down so aggressively, that was going to be an easy place to make money.

And so if you looked at SkyBridge at that period of time, we had about 45% of our assets there. So, the first factor is the macroeconomic factor. The second factor then is, once you figured out what sector you’re going to be in, who are the best guys in that sector and why are they the best? And frankly, a lot of them will be different depending on different markets. Some guys are longer than others. They’ll always be longer. Lee Cooperman is an example of that. If you’re a bull on the market, Lee’s a good bet. It’s that sort of thing.

On the fee structure of hedge funds:

Forbes: You’re a fund of funds, so to speak.

Scaramucci: Yes. Yes.

Forbes: And you know the rap, hedge funds 2%, 20%.

Scaramucci: Sure.

Forbes: Now your fees 1.5%, whatever it is, on top of that.

Scaramucci: Yes. Yes.
Forbes: How do you justify your existence?

Scaramucci: Well, listen. We’re up there with child molesters with most people, so I’ve got a hard time in justifying my existence at times. But I tell people the same thing that I think you would tell them if you were in my seat. Focus on net performance.

If you’re worried about fees, well then you certainly shouldn’t be in the hedge fund industry. But I think what we’ve proven, if you look at our long-term track record, we can help clients get to their actuarial goals by taking less risk, or less beta, if you will.

And so our performance is high single-digit, low double-digit over the last ten years with relatively low volatility. And so I think we’ve been able to justify that. But we did shift our model. I often talk about hedge fund fund of funds 3.0 in the sense that we’re viewing ourselves more like a multi-strat now. We look at the macro environment rather than trying to hug the index, like some of our peers.

The typical fund of funds got a bad rap because they weren’t doing the due diligence. And then they give you 50 managers. They’d give you a 2% in each of those managers. And you’d be hugging the index on your way to mediocrity. What we’ve tried to do, is we’ve tried to concentrate our portfolio on things that we think are working. We have a dynamic approach, where we will move out of securities or move out of hedge funds quickly if we think the market environment has changed. And we believe in concentration.

So, the top ten managers for us, Steve, are about 65% of the assets. And I think that’s differentiated us from our peer group. One last point, if you don’t mind me making it is that, if I’m giving a billion dollars out to somebody, if SkyBridge is giving out a billion dollars, we’re asking for fee concessions. And so we pass those on to our investors. So, even though we have all these loaded fees, so to speak, we’re giving back 75, 80 basis points a year in fee concessions, which I think is meaningful.

The entire interview can be read here.

Alicia Munnell: Should Insurers Handle Public Pension Payouts?

Last month, Pension360 covered the Urban Institute’s ringing endorsement of a Congressional bill that would let local governments turn over the assets of their pension plans to insurance companies, who would then make payments to retirees.

Senator Orrin Hatch proposed the bill, called the SAFE Retirement Plan.

On Wednesday, another major pension player threw their opinion in the ring: Alicia Munnell, director of the Center for Retirement Research at Boston College.

She begins by outlining why the Urban Institute likes the plan, and why the Pension Rights Center doesn’t:

The folks at the Urban Institute think that this plan is terrific. They gave it an “A” under all seven of their criteria: 1) rewarding younger workers; 2) promoting a dynamic workforce; encouraging work at older ages; 4) retirement income for short-term employees; 5) retirement income for long-term employees; 6) making required contributions; and 7) the funded ratio.

Essentially it does not allow sponsors to underfund plans (items 6 & 7) and provides a more equitable distribution of benefits across participants’ age demographics. That is, young and short-term workers get more benefits and older workers have less incentive to retire than under a traditional defined benefit plan. With their criteria, the Urban Institute researchers would always give a higher grade to any type of cash balance or defined contribution plan than to the current defined-benefit plan.

The Pension Rights Center lumps the Hatch proposal with other de-risking activities, such as General Motors transferring its retiree liability to Prudential. In the private sector, such a transfer means the loss of protection by the Pension Benefit Guaranty Corporation (PBGC), and reliance on the strength of the insurance company to provide the benefits. Such a loss does not occur in the case of state and local plans, because these plans are not covered by the Employee Retirement Income Security Act of 1974 and therefore benefits are not protected by the PBGC.

Munnell then delves into her own opinion:

First, I am not quite sure how it would work. In the private sector, a company can spin off only fully funded plans. But few public sector plans are fully funded. Is the suggestion to close down the current public sector defined benefit plan and send all future contributions to the insurance company? In many states that path would be quite difficult given that employers cannot reduce future benefits for current employees. So I am not clear how a SAFE Retirement Plan would actually be adopted.

Second, I am very concerned about costs. One issue is that investments would be limited to those acceptable for underwriting annuities, a requirement that means essentially an all-bond portfolio. Trying to produce an acceptable level of retirement income without any equity investments requires a very high level of contributions. My other concern on the cost side is fees; insurance companies need a significant payment to take on all the risks associated with providing annuities.

In short, the SAFE Retirement Plan doesn’t seem like either a feasible or efficient way to provide retirement income. Fortunately, the plan is optional. So, I’m moving on to other topics!

Munnell runs the Center for Retirement Research and the Public Plans Database.

Raimondo, Fung Fight Over Pension Funding, Fees

Allan Fung, Rhode Island’s Republican candidate for governor, released an ad last week slamming his opponent Gina Raimondo for paying “high fees” for “poor returns” on pension investments.

[The ad can be viewed above.]

Raimondo’s campaign issued the following statement refuting Fung’s claims and accusing Fung of mismanaging Cranston’s pension system:

“Allan Fung is recycling the same tired, misleading attacks on Gina that Rhode Islanders have already rejected. Everything Gina has done as Treasurer is to protect workers’ pensions. The fact is, Gina’s investment strategy is working and is providing strong returns with less risk.”

“In contrast, as mayor, Fung has failed to make full payments to the Cranston pension system and is proposing that we actually default on a debt the state owes. That’s reckless, risky and will hurt taxpayers,” she said of his stance on the 38 Studios bonds.

She cited annual financial reports indicating that the city never paid more than 87 percent of its required pension contribution the first four budget years Fung was mayor.

Fung’s spokesman responded to that attack with a subsequent statement:

“Cranston’s locally administered pension plan had been severely underfunded for years before Allan was elected mayor. … He increased contribution levels and negotiated a responsible pension reform plan,” and is “proud of the fact” the city budgets have had enough money to make full payment the last two fiscal years.

The Raimondo campaign has previously acknowledged that the pension system’s investment fees totaled $70 million in fiscal year 2012-13. Around $45 million of those fees were from hedge funds.

The Raimondo campaign has also clarified that the pension system’s hedge fund investments returned 8.8 percent in 2013. The system’s overall portfolio, meanwhile, returned 15 percent.

San Francisco Pension Backs Off Hedge Funds After Conflicts of Interest Surface

San Francisco Employees’ Retirement System (SFERS) was set to vote yesterday on whether the fund should allocate up to 15 percent of assets, or $3 billion, to hedge funds.

But the vote never happened, in part because of the objections of union members and retirees who showed up to the meeting. Recent reports of conflicts of interest surrounding the hedge fund investments probably didn’t help, either.

From the International Business Times:

San Francisco officials on Wednesday tabled a proposal to move up to 15 percent of the city’s $20 billion pension portfolio into hedge funds. The move came a day after International Business Times reported that the consultants advising the city on whether to invest in hedge funds currently operate a hedge fund based in the Cayman Islands.

The hedge fund proposal, spearheaded by the chief investment officer of the San Francisco Employees’ Retirement System, or SFERS, had been scheduled for action this week. If ultimately enacted, it could move up to $3 billion of retiree money from traditional stocks and bonds into hedge funds, potentially costing taxpayers $100 million a year in additional fees.

Pension beneficiaries who oppose the proposal spoke at Wednesday’s meeting of the SFERS board. They cited financial risks and the appearance of possible conflicts of interest in objecting to the hedge fund investments.

Prior to the meeting, the Service Employees International Union, which represents roughly 12,000 members who are eligible for SFERS benefits, asked city officials to have the hedge fund proposal evaluated by a consultant who has worked with boards that have opted against hedge funds.

David Sirota reported on the possible conflicts of interest earlier this week:

[SFERS is] drawing on the counsel of a company called Angeles Investment Advisors, one of a crop of consulting firms that has emerged across the country in recent years to aid municipalities in navigating the murky waters of managing money.

For two decades, Angeles has been employed by the San Francisco pension system to champion the best interests of city taxpayers and employees — the cops, firefighters and other municipal workers who depend on pension payments after their retirement. But the firm is concurrently playing another role that complicates its image as a disinterested guide: An International Business Times review of U.S. Securities and Exchange Commission documents has found that since 2010, Angeles has run a hedge fund based in the Cayman Islands that invests in other hedge funds.

In other words, the consultants that are supposed to be providing unbiased advice about whether San Francisco would be wise to entrust its money to the hedge fund industry are themselves hedge fund players.

SFERS says that, although the vote is tabled for now, it could be brought back at a later time.

This isn’t the first time the pension fund has delayed voting on hedge fund investments. In fact, it’s the third time: the board first delayed the vote in June. Then it delayed the vote again in August.

Think Tank Director: Corbett’s Pension Proposal Would Increase Pension Debt and Reduce Benefits

Stephen Herzenberg, the executive director of the Keystone Research Center, took to the newspaper on Monday to counter Pennsylvania Gov. Tom Corbett’s argument that the best bet for saving the state’s pensions would be to switch new hires into a 401(k)-type plan.

Herzenberg claims in an op-ed that such a plan would provide no savings for the state, reduce benefits for retirees and actually increase the state’s pension debt.

Herzenberg starts by talking about the fees and other costs associated with 401(k) plans. From the op-ed, published in the Patriot-News:

For two years, Governor Corbett has advocated a shift from pooled, professionally managed, defined-benefit pensions to a system where each employee manages an individual account, similar to a private sector 401(k) plan.

[…]

How does the efficiency of today’s defined benefit pensions system translate, in bottom-line terms, measured by the level of contributions required to fund retirement? According to the National Institute on Retirement Security, individual 401(k)-style accounts cost 45% to 85% more than traditional pooled pensions to achieve the same retirement benefit. That’s a big efficiency gap.

A lot of this efficiency gap results from the fees that financial firms charge holders of individual accounts – for administration, for financial management and trading stocks, and for converting savings at retirement into a monthly pension check guaranteed until the end of life – an “annuity.” In essence, these fees are transfer from Main Street retirees to Wall Street. In an economy with stagnant middle-class incomes and all the gains for recent growth already going to the top, such a transfer seems like the last thing we need.

Given the high fees and low returns of 401(k)-style accounts, it is hardly a surprise that actuaries who have studied the Governor’s proposal for an immediate switch to them – or a more gradual switch under a new “hybrid” proposal that the Governor now supports – don’t find any savings.

Far from providing savings, in fact, this switch could result in a large upfront transition costs – because the investment returns on the existing pension plans would fall as the plans wind down. The Governor’s plan was projected to have a $42 billion transition cost.

He goes on to write that Corbett’s plan would be “highly inefficient” and would actually reduce retirement benefits. From the op-ed:

The switch would also reduce retirement benefits. This is not only bad for teachers, nurses, public safety personnel, and other public servants. It could also require a future wage increase to enable the state and school districts to attract and retain high-quality staff – another cost to taxpayers.

In his recent book on inequality, economist Thomas Piketty worries that high returns and low financial management costs are only accessible to massive pools of wealth. This means that the assets of the wealthiest individuals and families grow faster than the wealth of the rest of us. It reinforces the drfit back towards Gilded Age levels of wealth inequality.

But in the context of public sector retirement plans, defined-benefit pensions give taxpayers and the middle class the ability to grow their pooled retirement savings in the same manner as Warren Buffet and Bill Gates.

If define benefit pensions are poorly managed, as they have been in Pennsylvania, they do create some challenges. As with paying a credit card bill, if you don’t put in the required contributions you can run up a large expensive debt. But the way to fix that problem is to pay the required contributions, not to switch to a highly inefficient retirement savings vehicle.

Read the entire column here.

London Mayor Wants Pension Funds to Invest In UK Infrastructure

London Mayor Boris Johnson wants to merge the country’s 39,000 public sector pension plans into one scheme, which would invest in building and updating the UK’s roads, airports, railroads and other infrastructure.

The Mayor says the plan would give pensioners great returns while improving the infrastructure of the country. From the Daily Mail:

A single fund could be used to create a ‘Citizen’s Wealth Fund’ to boost the economy and improve roads, rail and airport links.

Mr Johnson argued in the Daily Telegraph that incomes from tolls on new roads, passengers on new railways and airport charges would help create returns of up to 8 per cent for pensioners who invested with them.

He calculated local authority pension funds alone could hold assets of more than £180billion, while combining all public sector pensions would yield ‘hundreds of billions’.

Mr Johnson said: ‘There are more than 39,000 public sector pension funds in this country – each with its own trustees, managers and advisers and accountants. The waste is extraordinary.

‘Think of all those advisers and investment managers taking their fees – their little jaws wrapped blissfully around the giant polymammous udder of the state. Think of the duplication.

‘But it is worse than that – because this country is missing a huge opportunity, and one that is being exploited by more sensible governments around the world.’

Mr Johnson said: ‘The little pension funds will fight for their independence; they will make all sorts of spurious arguments about the need for “localism” in managing this dosh, when of course the advice is all subcontracted to the same legion of investment managers, and when what they really care about is their fees and their tickets to Wimbledon…and their golf-club bragging rights.

‘The vested interests must be ruthlessly overridden. It is time for Britain to have its own Citizens’ Wealth Fund, deploying our assets in a useful way, helping us to bolster pensioners and cut pointless public expenditure at the same time.’

Pension funds from other countries, such as Canada, have invested in British infrastructure already.

The Mayor originally proposed his plan in an op-ed yesterday in the Telegraph, which can be read here.

Photo By Andrew Parsons/ i-Images

Some Private Equity Firms Want More Opacity In Dealings With Pension Funds

Private equity firms are growing uncomfortable with the amount of information disclosed by pension funds about their private equity investments.

PE firms are cautioning their peers to make sure non-disclosure agreements are in place to prevent the public release of information that firms don’t want to be made public.

Stephen Hoey, chief financial and compliance officer at KPS Capital Partners, said this, according to COO Connect:

“We had correspondence with a municipal pension fund relating to the Limited Partner’s inquiry regarding the SEC’s findings from our presence exam. We objected to our correspondence with the LP of matters not relating to investment performance including notes taken by the LP representatives being submitted to reporters under the Freedom of Information Act (FOIA). It is our communications with LPs other than discussions about performance metrics that we object to being in the public domain.”

Pamela Hendrickson, chief operating officer at The Riverside Company, said PE firms should know exactly what pension funds are allowed disclose to journalists. From COO Connect:

“GPs should make sure their LP agreements and side letters are clear about what can be disclosed under a Freedom of information request. GPs must comply with any non-disclosure agreements they have with their portfolio companies and information provided under the Freedom of Information Act should be restricted to ensure that the GPs remain in compliance,” said Hendrickson.

It’s already very difficult for journalists to obtain details and data regarding the private equity investments made by pension funds.

But PE firms are worried that the SEC will crack down on fees and conflicts of interest:

The SEC has recently been questioning private equity managers about their deals and fees dating all the way back to 2007. There is speculation the US regulator could clamp down on private equity fees following its announcement back in 2013 that it would be reviewing the fees and expenses’ policies at hedge funds amid concerns that travel and entertainment costs, which should be borne by the 2% management fee, were in fact being charged to end investors.

“The SEC is taking a strong interest in fees, and this has become apparent in regulatory audits as they are heavily scrutinising the fees and expenses that we charge. Following the Bowden speech, we received a material number of calls from our Limited Partners whereby we explained our fee structure and how costs were expensed accordingly. We also pointed out that our allocation of expenses was in conformity with the LP agreements, which is the contract between the General Partner and a fund’s limited partners,” said Hoey.

COO Connect, a publication catering to investment managers, encourages PE firms to use non-disclosure agreements to prevent the public release of any information the firms want to remain confidential.

Photo by Truthout.org via Flickr CC License

Patriot News: Are Hedge Funds Right For Pennsylvania?

Last week Pennsylvania’s auditor general publicly wondered whether hedge funds were a sound investment for the state’s “already stressed” pension systems.

The crux of the auditor’s concern was the millions in fees paid by the system. In an editorial Monday, the Patriot News also questioned the fees incurred by hedge fund investments – including the fees that the public doesn’t know about. From the Patriot News:

The Pennsylvania State Employees’ Retirement System (PSERS) paid about $149 million in fees to hedge funds in fiscal year 2013, according to WITF, the public broadcasting station.

The Philadelphia Inquirer has noted that “It’s hard to know how much Pennsylvania SERS paid, since some SERS hedge fund fees aren’t included in the agency’s annual report.”

WITF also noted that it’s not clear what the pension fund got after paying all that money, which is the point raised by Auditor General DePasquale.

[…]

Pennsylvania has been one of the most aggressive states investing in “alternative” vehicles like hedge funds. In 2012, The New York Times reported that Pennsylvania’s state employees pension fund had “more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.”

Those investments cost Pennsylvania $1.35 billion in management fees in the previous five years, according to the Times report.

The editorial wondered whether the state was really getting what it paid for performance-wise. From the Patriot News:

During that time, it appears Pennsylvania paid more and got less than other states did.

Over the five-year period, Pennsylvania’s annual returns were 3.6 percent. During that time, the New York Times report said the typical public pension fund earned 4.9 percent a year. And Georgia, which was barred by law from investing in high-fee alternative funds, earned 5.3 percent a year.

Georgia’s fees were a lot lower, too. For a pension fund about half the size of Pennsylvania’s, it paid just $54 million in fees over the five years. Pennsylvania paid 25 times as much for results that were significantly worse.

Pennsylvania’s two big pension funds are tens of billions of dollars short of being able to pay all the money they’ll owe to retirees.

One has to wonder whether one reason is that the funds are spending too much money on supposedly sophisticated investments that aren’t worth the cost.

It’s a question the Legislature needs to answer.

SERS allocates 7 percent of its assets, or $1.9 billion, towards hedge funds. PSERS, meanwhile, allocates 12.5 percent of its assets, or $5.7 billion, towards hedge funds.

North Carolina Pension To Stick With Hedge Funds As Major Union Calls For Divestment

A few days after CalPERS pulled out of hedge funds, the State Employees Association of North Carolina (SEANC) called on North Carolina’s pension fund to do the same.

The pension fund, however, has shown no willingness to follow in CalPERS’ path, and recently doubled down on its support of hedge funds as part of its portfolio.

Originally, SEANC released this statement:

“Other institutional investors around the world could potentially follow CalPERS’ lead and finally dump these high-risk funds,” said SEANC Executive Director Dana Cope. “Those who wait to cash in may find the money’s gone. That’s not a risk state workers are willing to take. It’s time to pull out of these investments now before the cart starts going downhill too fast for us to jump off.”

Hedge funds are notorious for high fees. Pension funds and investors pay these fees in hopes that the payoff will be higher, but for the past decade, hedge fund performance has been lacking. Cowell has the power to invest of 35 percent of the $90 billion state retirement system in “alternative investments,” a term that includes hedge funds.

But North Carolina hasn’t budged, and pension officials have supported their hedge fund allocation. From the News & Observer:

Kevin SigRist, chief investment officer of North Carolina’s $90 billion fund, said that the state is by and large pleased with the performance of its hedge fund investments and plans to stay the course.

North Carolina’s hedge fund investments generated an 11.48 percent return for the fiscal year that ended June 30, as well as a three-year return of 6.86 percent and a five-year return of 7.59 percent. That 11.48 percent return bests the 7.1 percent return that CalPERS reported from its hedge fund portfolio and compares to the state’s 15.88 percent overall return for its latest fiscal year.

“We would expect to continue to evaluate (hedge funds) and use them where appropriate and where we think there are benefits to the trust fund,” SigRist said.

[…]

SigRist said that the fact that hedge fund investments cut across asset classes is at the heart of why North Carolina doesn’t disclose how much of its pension fund is allocated to hedge funds – a practice that has drawn SEANC’s ire. Although the pension fund has stipulated the allocation to hedge fund strategies, he added, that’s only a piece of the pie because it’s based on an antiquated concept of what a hedge fund is.

Currently, North Carolina’s pension system has $3.9 billion in hedge funds, or 4.3 percent of total assets. They paid $91 million in fees to those funds in 2013.

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