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Insider Probe Impact Felt by Pension Funds?
Steve Eder of the WSJ reports, Insider Probe Impact Felt by Pension Funds:
The
federal insider-trading probe is being felt beyond the world of hedge
funds and "expert network" firms in New York and Silicon Valley.
Investors in some of the hedge funds involved are struggling to get
information and decide whether to sell their positions.
The
scandal hit close to home for the $10 billion School Employees
Retirement System of Ohio: The pension fund is invested in two hedge
funds raided as part of the investigation. Soon after the news of those
raids broke in November, executives of the pension fund flew to New
York to question the two firms, Level Global Investors LP and
Diamondback Capital Management LLC.
A
contact at Diamondback told them the fund's managers would be limited
in what they could say about the investigation but offered to provide
an update on the fund's portfolio. The pension executives balked. "We
have to do our job. I don't want a portfolio update," one of the
pension fund's investment executives, Phil Roblee, wrote to another
employee in an email on Dec 6.
Level Global and Diamondback,
which haven't been accused of wrongdoing, have told investors they
aren't targets in the probe. Spokesmen for Diamondback and Level Global
declined to comment for this article.
Details of the exchanges
between Diamondback and the Ohio pension fund offer a look inside the
relationship between a hedge fund and a big client during a period of
turmoil. The information was obtained by The Wall Street Journal as
part of a public-records request made to the Ohio pension system.
As
part of the three-year investigation, U.S. officials are investigating
whether consultants and employees for so-called expert-network firms,
among others, illegally funneled nonpublic information to hedge funds
and other firms. In exchange for a fee, expert-network firms connect
investors looking for an information edge with employees at public
companies.
In early December, Mr. Roblee, head of alternative
investments at the Ohio pension system, and Jason Naber, investment
officer for hedge funds there, went to New York and Connecticut and met
with principals of Level Global and Diamondback in their offices.
A
day before the meeting with Diamondback, its head of marketing and
client services, Vickram David, told Mr. Naber during a phone call that
the hedge fund principals' "won't be willing to answer a lot of
detailed questions about compliance in the meeting tomorrow as they are
still cooperating with the government and would not want to 'front run
that process,' " Mr. Naber wrote in an email to Mr. Roblee summarizing
the call, adding that Mr. David had suggested they could do a
portfolio update.
In the Dec. 6 email, Mr. Roblee told Mr. Naber that a portfolio update wouldn't be good enough.
Mr.
Roblee, in an interview, told the Journal that he found both meetings
to be useful and that the managers were "up front" in terms of their
response to the investigation.
So
far, the Ohio fund hasn't sought to withdraw assets from Level Global
or Diamondback, Mr. Roblee said. Nor have several other public pension
funds, including New York State Common Retirement Fund, invested with
both Diamondback and Level Global, and the New Jersey Division of
Investment, invested with Level Global, spokesmen said.
Representatives
at several funds say they have been talking to consultants, watching
the news, and communicating with their boards as the investigation
wears on.
Should a hedge fund or its
executives be charged by civil or criminal authorities in the matter,
that would likely prompt pension funds to seek to withdraw assets,
according to people within the industry.
In
Philadelphia, the Public Employees Retirement System is holding onto
its investment in Diamondback, which has been a top performer with a
15.3% cumulative return since the system invested $20 million with the
manager about two years ago, said Francis X. Bielli, the system's
executive director.
"We invested for the return, and quite frankly, our return with Diamondback has been very good," Mr. Bielli said.
Some
pension funds said they are getting accustomed to bad news, since the
financial crisis and more recent insider-trading cases. "You have to be
prepared for stuff like this. Sometimes the knives are falling and we
get stabbed," said Joelle Mevi, the chief investment officer of New
Mexico's Public Employees Retirement Association, in an interview
shortly after the November raids.
The association has $44 million invested in Diamondback and no plans to redeem, a spokesman said.
Newer
investors in the hedge funds may not be able to withdraw money
quickly, due to requirements that they invest for a minimum period of
time. Nor may they want to, especially if the manager is delivering
strong performance.
Some investors are looking to leave.
Diamondback recently told clients that investors had so far asked to
pull $400 million ahead of a mid-February deadline to request
quarter-end redemptions, and that it is unclear how much more might be
withdrawn, people familiar with the matter said.
Level
Global has more than $4 billion under management and Diamondback has
more than $5 billion, according to people familiar with them.Diamondback
this month has offered investors a management-fee cut—offering to
reduce the annual flat fee to 1.75% of assets invested from its current
2%—as an enticement to keep clients' money in place, the people said.
Diamondback
told clients that the firm will hold back 1% of whatever they withdraw
in order to fund a reserve account, one person said. The account would
be used if Diamondback funds eventually have to disgorge profits it
has made as a result of the probe, the person said.
Diamondback
also told investors that the management company, not investors, has
paid all expenses related to the investigation and will do so this year
as well.
Pension funds have been investing
aggressively in hedge funds and that leaves them exposed to operational
and reputation risk on top of investment risk. Nonetheless, in regards
to this particular case, there is no use jumping the gun and redeeming
funds before the investigation is over. If civil or criminal charges are
laid, then they can reassess what course of action to take (even then,
redemptions might not be necessary depending on who is charged).
What investors need to know is that hedge funds are making a comeback after getting creamed in the 2008 crisis. According to Svea Herbst-Bayliss of Reuters, Hedge fund industry assets swell to $1.92 trillion:
Hedge fund assets grew a record $149 billion during the last three months of 2010, according to new data released on Wednesday. According Investors added $13.1 billion in new money during the last quarter after having put in $19 billion in the third quarter. In wealthy investors added $55.5 The The But "The second half of 2010 "As the industry is Macro Event-driven funds which focus on mergers and acquisitions were also popular, pulling in $14 billion during 2010. But What do all
to Hedge Fund Research (HFR), which tracks industry performance and
asset flows, hedge funds around the world now invest $1.917 trillion.
total, pension funds, endowments and
billion in new money in 2010, the highest annual total since 2007. The rest of the increase during the last quarter came from market gains.
increased flows came even as the industry delivered only lackluster
returns of 10 percent, lagging behind mutual funds and the industry's
own more impressive 19 percent gain in 2009.
industry is almost back to its peak size of the second quarter of
2008, when assets hit $1.93 trillion, right before the height of the
financial crisis.
the flows also suggest investors are taking a more cautious stance by
sticking with established players. The data show that 80 percent of net
new assets went to big fund firms that oversee more than $5 billion in
assets.
was a historic time in the hedge fund industry, characterized by
powerful and pervasive trends shaping the institutional landscape of the
hedge fund industry", Kenneth Heinz, President of HFR, said in a
statement.
positioned to surpass its previous asset peak, global investors are
focused on the dynamics of inflation protection, strategic
specialization, enhanced liquidity, improved structure and transparency
for accessing hedge fund performance in coming years," he said.
and relative value funds were the most popular with investors, as
clients hoped those types of funds could best navigate volatile currency
and interest rate markets.
the industry's biggest category, equity hedge funds that can take long
and short bets, failed to excite investors and added only $2.6 billion
in new money during the year.
these hedge fund assets mean? It means markets are getting primed for
the next ramp-up. It's going to be volatile, but liquidity flows are
pushing risk assets higher. I suspect a lot of cautious fund managers are going to get caught flat-footed in 2011 as the big hedge funds and banks ramp up. The first weeks of trading mean nothing but pay attention, I think we're getting a taste of what lies ahead.
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We need more criminal penalties. The executives lose nothing when they pass the civil (money) penalties off to the shareholders.
If they saw jail time they would think twice before their fraud...opps, I meam "alleged" fraud.
Leo did you see CD's lament? suffice to say you are one of the many good things about ZH along with Krasting, Robo and other assorted commenters/contributors
herd mentality Leo.. slow to respond... slower even still to react.. great space to be infront of them though on anything.
This would be an example of the "public servants" looking after the "public employees" retirement pension plans by placing them under the control of "professionally managed" funds you've been discussing of late?
Myself and others were only trying to help...(grunt employees)...Steve Rattner should have been your first clue...it's like a virus, they move in the same circles, whoever they come in contact with is infected.
Individual control can mitigate personal portfolio damage.
I am sorry for their impending loss.
"According to Hedge Fund Research (HFR), which tracks industry performance and asset flows, hedge funds around the world now invest $1.917 trillion".
...primed for the next ramp-up, yes sir. Just like the last ramp up, and the one before.
http://finviz.com/futures_charts.ashx?t=ES&p=w1