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Pensions Leap Back to Hedge Funds?
Steve Eder, Gregory Zuckerman and Michael Corkery of the WSJ report, Pensions Leap Back to Hedge Funds:
Public
pension plans are lifting hedge-fund investment, seeking to boost
long-term returns despite losses suffered in some funds in the
financial crisis.Also, pension officials are using the
historically strong returns of hedge funds to justify a rosier future
outlook for their investment returns. By generating more gains from
their investments, pension funds can avoid the politically unpalatable
position of having to raise more money via higher taxes or bigger
contributions from employees or reducing benefits for the current or
future retirees.
The Fire &
Police Pension Association of Colorado, which manages roughly $3.5
billion, now has 11% of its portfolio allocated to hedge funds after
having no cash invested in these funds at the start of the year.
"There
has been some deserved criticism of hedge funds, but many hedge funds
during the market downturn in 2008 did better than the S&P 500,"
said Dan Slack, the chief executive of the system.
While
pensions have been investing in private equity and what are called
alternative investments for many years, hedge funds have represented a
smaller part of their portfolio. The average hedge-fund allocation
among public pensions has increased to 6.8% this year, from 6.5% for
2010 and 3.6% in 2007, according to data-tracker Preqin.
The
number of public pension plans investing in hedge funds has leapt 50%
since 2007 to about 300, according to Preqin. State pension systems had
$63 billion invested in hedge funds as of their fiscal 2010 and are
expected to invest another $20 billion in hedge funds in the next two
years, according to a recent report by consultant Cliffwater.
Hedge funds typically bet on and against stocks, bonds or other
securities, often using borrowed money. Investors have been giving more
cash to hedge funds in recent months, as they regain comfort with
markets after two years of solid returns.
On
average, hedge funds as a class have delivered for large pension funds
that have dabbled in them over time, data show. Large pension funds
scored median annualized returns of 6.8% investing in hedge funds in
the past decade, compared with 5.7% from stocks and 6.1% from bonds,
according to Wilshire Associates, an investment consultant in Santa
Monica, Calif. Private equity delivered 6.7%.
While hedge funds
outperformed stocks in the financial crisis as an industry, some
individual funds suffered significant losses or closed.
When
looking at average hedge-fund performance, "there is nothing magical
being created," said Steven Foresti, head of the investment research
group at Wilshire. "They are not a panacea."
David St. Hilaire, who oversees the $230 million City of Danbury
Retirement Plan, created hedge-fund investments for his fund's
comparatively smooth recovery from the financial crisis and calls them
helpful from an actuarial standpoint because of the returns they
project. He said the fund has 27% of its assets in alternatives and that
this percentage is likely to get bigger.
In March, the New
York City Police Pension Fund voted to invest in a firm that puts money
into a variety of hedge funds, the first such move by the city's
pension funds, which manage $117 billion. In the past few months, two
more New York City pensions made the same decision. Together the three
funds invested $450 million with hedge-fund firm Permal Group.
It
is a "first step into hedge funds," said Larry Schloss, the New York
City chief investment officer. He says he hopes the investment will
help the city's pension system avoid the "wild ride" it has taken in
recent years. The system had $115 billion before market tumble in 2008,
when it fell to $77 billion.
New
Jersey's State Investment Council, which sets investment policy for the
state's pension fund, voted last week to raise the target allocation
for hedge funds to 10% from 6.7%, which would make hedge funds the $73
billion fund's largest alternative investment asset.
The
bullishness comes despite a moment in the financial crisis when the
fund found itself adding cash to hedge funds it was invested in that
were wobbling."Whatever problems we've had, hedge funds have
been our best performer among our alternatives," said Andrew Pratt, a
spokesman for the New Jersey Treasury, which oversees the pension
fund's investment operations.
By
contrast, the Pennsylvania State Employees' Retirement System has been
paring its hedge-fund allocation to about 15% at the end of 2010 from
about 26% at the start of 2008.
The $25 billion pension system
was disappointed after suffering a 16% loss on its hedge-fund
investments in the financial crisis despite pursuing a so-called
absolute return strategy that has a goal of no losses, a pension fund
spokesman said.
"We see hedge funds as having a smaller, though
still significant and important role in the asset mix," spokesman
Robert Gentzel said.
I have already written a comment asking whether hedge funds have grown too large.
Let me explain why the current mania pension funds have with hedge
funds is a double-edge sword. On the one hand, underfunded pensions are
looking for absolute returns and following the 2008 crisis, they are
managing their liquidity risk more closely. For example, the Ontario
Teachers' Pension Plan manages liquidity risk very carefully, and
invests in hedge funds almost exclusively via a managed account
platform, allowing them to have full control over the liquidity of the
underlying funds.
Private equity and
real estate have been strong alternative asset classes over the years
but they're liquidity profile may not be optimal for mature,
underfunded pensions managing liquidity risk very carefully. If they
need to raise cash fast, they can't just sell a building or their stake
in some private equity fund quickly (if they do, it will be at a deep
discount). Even in the hedge fund space, the bulk of the assets are
going to TAA and global macro managers, Long/Short Equity and commodity
trading advisors (CTAs). Why? Because they're scalable strategies and
large pension funds prefer writing $50, $100 or $200 million tickets to
a few well known established "brand" names than writing small tickets
to many less liquid absolute return strategies (more on this below).
On
the other hand, the mania with hedge funds is sowing the seeds of the
next financial crisis. It won't happen anytime soon, but when billions
are being poured into hedge funds, regulators better pay attention to
macro systemic risk. The role that large hedge funds and large bank prop
desks played during the last credit crisis is still poorly understood.
Economists still can't figure out the linkage between hedge fund asset
growth, liquidity, credit conditions, financial leverage, asset
bubbles, financial crisis and their effect on the real economy.
Over the last two and half years, I've been getting blasted on Zero Hedge
for telling investors to keep buying the dips. My view remains that
the financial oligarchs will do whatever it takes to reflate risk
assets and introduce some inflation in the system. By allocating more
and more assets into hedge funds, public pension funds are able to
bypass the leverage constraints they have in their traditional assets
and they are also introducing a boom in liquidity into the global
financial system, thus helping the financial oligarchs achieve their
goal of relating risk assets and introducing inflation in the economic
system. Absolutely nothing has changed, which is one reason why I
expect a lot less volatility going forward (less, not more because
everyone will be bidding up risk assets).
Eventually the music
will stop, most likely when the Fed signals the start of a rate hike
campaign, but there is so much liquidity and leverage in the financial
system that it will take several rate hikes before we see speculative
activity tapering off in any meaningful way. In the meantime, global
pensions and sovereign wealth funds will keep pouring billions into
hedge funds and other alternative asset classes.
Let me make a few suggestions to pension funds looking to invest in
hedge funds. If you don't know what you're doing in hedge funds, and
don't have the in-house expertise to select your own managers, you're
better off paying that extra layer of fees and partnering up with a top
fund of funds (or even a smaller, less well known one) that will help
you invest in hedge funds. You are better off selecting one or two fund
of funds, writing them a big ticket and using this relationship to
develop in-house expertise to then go the direct route.
Last Friday, I chatted with Rick Dahl, CIO at the Missouri State Employees' Retirement System (MOSERS),
on many pension related issues. I am going to write a full comment on
MOSERS because they're the best US public pension plan. There are a lot of reasons why and chief among
them is they got the governance right. I credit Rick and Gary Findlay,
MOSERS' Executive Director for their work on getting the governance
right. I also think highly of Rick on a professional and personal level.
When it comes to managing a pension fund, you can't ask for a better
CIO.
Rick was telling me when MOSERS first got into hedge funds, they wrote two big tickets to Blackstone and PAAMCO
which they still use as advisors. However, Rick was smart about the
way he allocated to these fund of funds. At the time he invested
significant amounts which represented a sizable chunk of their assets
and he signed an investment manager agreement which stipulated knowledge
transfer where his staff could visit these fund of funds managers on
their premises and learn from them for two or three days a quarter.
Importantly, you don't just want to give money to a fund of funds, you
want to learn from them and squeeze everything you can from the
relationship without abusing them.
I mention this because far too
many public pension funds are clueless about investing in hedge funds
and typically follow the advice of pension consultants. Some
consultants are good but most of them are terrible and haven't the
faintest idea of what's in the best interest of their pension clients.
Worse still, many consultants and prime brokers with cap intro groups
are fraught with conflicts of interest and will recommend hedge funds
or fund of funds that they invest in or trade with. Again, there are
excellent independent consultants and third party marketeers but
they're a dying breed.
Let me wrap things up by getting back to a previous comment on Quebec's absolute return fund. I've been hearing that HR Strategies,
the fund of funds mandated by the Caisse de dépôt et placement du
Québec, Fondaction CSN and Fond de solidarité FTQ to run the $175
million SARA Fund, has already started disbursing funds. The problem is
that the lion's share is going to already well established funds run by
managers that are already multi-millionaires.
I have no issues with these successful, established managers and want
them to continue on this path of success, but I sincerely hope HR
Strategies will also seed some new funds run by younger managers with
tremendous potential. Let me repeat what I stated before: there are
exceptional, young absolute return managers in Quebec that are not
getting the support they rightly deserve by Quebec's largest financial
institutions (Caisse, PSP Investments, Desjardins, Fondaction, FTQ,
National Bank and Hydro Quebec).
This is a tragedy for Quebec's finance community. I was
at the gym the other day after meeting a couple of these new talented
managers and my trainer and I started chatting about hedge funds. He's
Canadian of Lebanese origin and it turns out his friend is Tim Barakett's
father. In case you don't know, Tim Barakett is the founder of
hedge-fund firm Atticus Capital, which handed $3 billion back to his investors
two years ago and closed down his flagship fund to spend time with
his family. Along with his brothers, they are arguably the most
successful investment managers from Quebec (apart from, of course, the
Desmarais family, one of the richest and most powerful families in
Canada).
I mention this because apparently Tim Barakett once said
to become successful, you need to get out of Quebec. It's sad but
true. Most of the ultra successful Quebecers in finance that I know got
out of Quebec. This needs to change. HR Strategies and Quebec's large
institutions should place more emphasis on seeding Quebec absolute
return managers, just like Ontario Teachers' did in Ontario.
Going
primarily with established managers is good for HR Strategies when it
markets its fund of funds to investors, but it doesn't create new jobs
and it doesn't raise the profile of Quebec's financial industry (HR Strategies should publicly disclose which funds got what amounts and based on what criteria and deal terms).
These large and powerful institutions need to step up to the plate and
start seeding new managers with tremendous potential. God knows we
have plenty of them right in our backyard that are being ignored for
purely political reasons.
This really pisses me off. I feel like
starting my own seed fund. It will be run on a managed account
platform, fully transparent, zero operational risk, and invest in
diverse strategies run by Quebec's young but talented absolute return
managers. If pension funds were smart and not engaging in
cover-your-ass politics, they would be actively seeding young, talented
absolute return fund managers.
If you've seen what I have seen
in Montreal in terms of quality managers with years of experience at
large shops struggling to raise more assets for their fund, you would
be utterly dismayed. These managers deserve more assets and they need
more financial support. If you're a large global asset manager or even
large family office, please contact me (LKolivakis@gmail.com) and come
visit our beautiful city. Let me show you why I am beating the drum
hard on Quebec's talented absolute return managers. They can compete
with the best hedge fund managers in the world. I should know, I used
to invest in them.
***Public Disclosure***
Public disclosure: I am not in the cap intro business, at least not yet. I have no signed legal agreements with any of the funds that
I am discussing on my blog and have not met all of them. I am very
impressed with the ones I have met and have absolutely no qualms
recommending them to public pension plans and sovereign wealth funds.
Importantly, I would never recommend any fund that I wouldn't invest in
myself.
Below, Aleks Weiler, senior portfolio manager at CPPIB, says it like it is. Don't trust the track record, understand why people are making money, and focus on the character of the fund managers. Are they trustworthy?
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Pensions should not be able to "invest" money in ANY unregulated products or "invest" in
any unregulated industries. Period. It made me ill when Bernanke gave money to
regulated banks and "told them" to extend credit to hedge funds...
Below, Aleks Weiler, senior portfolio manager at CPPIB, says it like it is. Don't trust the track record, understand why people are making money, and focus on the character of the fund managers. Are they trustworthy?
Best performance over 10 yrs, 8.4 from real estate, and that number is crashing.
Inflation running 15% - 20% per year now.
PPF are so fucked.
Leo and RoboTrader, both living in a nominal fantasy completely ignoring what Bernokio's doing to those nominal returns.
Don't you mean Bernnochio?
I get it though, and like it ;-)
Don't worry. The president is proposing raising premiums for the Pension Benefit Guaranty Corporation. All our lovely government and municipal pension funds must do to liquidate their pension problems is enroll in PBGC and pay a few more pennies in premiums. Pension problem solved. See how easy it is.
What a Ponzi!
Bernie was so good at it! "Skim" from the Top" of the funds. Claim you invested your best..meh returns.
Now it's finally LEGAL! :-) Hoorah!
Get your pubic employees on the hook!
http://publicceo.com/index.php/local-governments/151-local-governments-p...
a short history of how calpers got in the stock market business. what they did was remove the control of the state employee pension funds from the state level and moved that control mechanism to new york. and we all know what happens in new york don't we? imho, we are talking about tax payer monies that have been extorted from citizens. the expectations of state employee retirements are way out of line. the level of corruption in this business is totally out of control. if most hedge fund managers are like jimbo cramer and i am sure they are, they will kill their own mothers to make a buck and save their own asses...it is obvious by reading this article that they have learned nothing, nothing at all. when you double down, you are asking for another heart attack and believe me, when they set the hook this time, it will be curtains for sure. leo can spend all day telling me how great things are, but i must be that little voice sitting on the shoulder saying......quidado mi amigo.......quidado......but, as the old saying goes, it is always easy to mess around with opm, that is other people's money. and when you lose your shirt, then you will say, well our laws say we must make this right and then they come to me saying. well we lost on our bets but you the taxpayer must make it right. in texas where i live , there is no political climate for this now. anyone that tries to raise taxes, is on a short political road to poltical suicide. the well is dry. the hedgies need that pension fund money back in the game so they can play their games. matter of fact the stock market would not be shit, and would be the playground of the rich, where they can gamble and afford to lose their money, like it used to be, but now they have the public pension fund monies there , and so they continue on, making a market out of something, whatever that is......but, this too shall pass.
The question posed in the headline of this piece is so profoundly naive, I suddenly thought I had gone back in time to 1997.
just one last chance for some big skimming before the eventual collapse of the pension ponzi scam
Pension fund management is the 3rd most corrupt organization behind The US Govt and Unions.
These guys are the biggest skimmers on the planet. No need for ponzi's with these jokers
Yup. The amount of illegal off balance sheet fees that get thrown back and forth between fund manager and hedgie is disgusting. And please, "Fund of Funds" hedge funds being gobbled up by pensions!! These are even worse than CDOs.
This is the beginning of the end for the market. One big blow off top to make these pension fund managers "look" good and then splat. Huge pools of cash that will be abused. Participants will start taking loans again against their pensions and 2008 part deux will commence.
Pension funds should be banned from investing in hedge funds. Any manager that invests in a hedge fund should be sued for breach of fiduciary responsibility. Pension managers jobs are no different than a hedge fund manager in terms of research and risk analysis. Why should the pensions pay 2 and 20 when the fund manager and his crew should be doing the exact same work.
Once the demographics shift(in the US at least) in 2013, the outflow obligations will dwarf the capital inflows and these guys will get even more desparate and take even more risk to meet their obligations.
Then you'll see the sharks come in and wipe out everyone. It's so comforting that we have the PBGC to bail out these dipshit managers.
Pensions leaping back to hedge funds.
The most predictable behavior on the planet is the actions of desperate people.
Leo laments about the plight of some Hedgies in Montreal "These managers deserve more assets and they need more financial support" and then kindly offers to play the role of matchmaker even offering his email address to prospective marks.
I do not criticize Leo for this, just the opposite, go for it Leo the payoff for such introductions can be extremely good even if sucking up to hedgies in your blog is the price.
Public disclosure: I am not in the cap intro business, at least not yet. I have no signed legal agreements with any of the funds that I am discussing on my blog and have not met all of them. I am very impressed with the ones I have met and have absolutely no qualms recommending them to public pension plans and sovereign wealth funds. Importantly, I would never recommend any fund that I wouldn't invest in myself.
legalities, I introduced a person to a real estate agent friend (big ticket property) without the expectation of anything, to my surprise the agent was willing to offer a meaningful finders fee. Consider a 2 and 20 hedgie who lands a billion dollar chunk of a large pension, that's the gift that keeps on givin'
(the money is quite frankly unimaginable, many are just normal guys with families who actually don't work as hard as you might think but they spend more in a day than most earn in a year)
I know of one independent cap intro, third party marketeer who made a fortune and lives a great life. But unlike most, he spends 90% of his time researching managers and would never, ever recommend a fund to any of his clients if he didn't do his own due diligence on it and grilled them. Like his style and his integrity. Talked to him about opening an office in Montreal but he doesn't want to expand (he is 74, in top shape and doesn't need more money). I was joking with him that most of the cap intro firms I knew were sharks full of conflicts of interest and many just hire hotties in short skirts and tight tops to peddle funds. It's such a joke but it's effective because there are lots of stupid, horny pension fund managers out there. Anyways, this guy told me that I have the contacts and the experience to run my own operation. I would do it with a few other experienced people I know in Montreal, but not on my own. And cap intro looks deceptively easy, but it isn't. If you get burned once, recommending a bad fund, good luck recovering. But if you make it, recommending top funds, it's a generous annuity for life! Does anyone know what the standard fees are for cap intro? 25 or 50 basis points per million and what percentage of performance fees?
Leo, the opportunities for 'legal' corruption are endless. There is so fcking much money and so little accountability. I do not know what the solution is but I do know that when the very largest "reputable" financial institutions can engage with impunity in the laundering of hundreds of billions for the Mexican cartels then the potential for shenanigans between a some hedge fund and a manger of pension funds are endless.
I think the critical point as it pertains to public pensions is that ultimately/indirectly that is taxpayers' money. I could give a flying fck if a family office chooses to put their money with a hedgie while enjoying the perks if that is what they are into but for some halfwit public pension manager getting his rocks off on a yacht somewhere in the Med while some senior is eating cat food in a basement apartment, that's a different story.
''Leo, the opportunities for 'legal' corruption are endless. There is so fcking much money and so little accountability.''
You're telling me? I could write a book on the shit I've seen and heard of at public pension funds. Having said this, there are many hard working, good, ethical people working at these funds too and it's not fair to cast them along with the sharks.
I don't disagree that there are good guys out there, but with the surge towards the hedgies the opportunity for corruption increases by many orders of magnitude
Vastly more thought out than previous hedge fund promos. Leo getting better by reading ZH
Leo,
Pension fund managers get a kickback from hedgies for investing public cash in their funds.
Bonuses all around, except for the pensioners.
Nice piece Leo, but you fail to acount for the total lack of the concept of 'chain of liability'. You see, where-ever the largess resides will ultimately fail, it will also be the least likely recovery liability (cents in the dollar). It is 'any' concentrated liability that is an indemic US problem (call it phenomenon) that will be foreclosed upon. Did the GFC not teach you that?
If you were to plot on a graph the largest liabilities verus recovered monies, you will soon see you have zero chance of getting 1:1 on the next sojourn.
All delivered with 100% impunity by your gracious and completely ignorant Congress.
ergo: where-ever you want to place the largest amount of liability, is where it will ultimately fail. Without recourse.
Leo,
Negative real rates are not going to generate the 8% stated returns needed to match liabilities. Therefore there is a chase on for yield. Where have you been?
Also think it is a nice piece, Leo.
Time to get long again?
Yen crosses possible for a lot of upside but not showing it so far, maybe reflecting weak 'risk appetie'..
Yes, start your own seed fund. Some Greek 10 year bonds, Chinese solars. Good calls all.
Actually you've been on this story for some time Leo and this is your best to date. I say "just say focused on it" and "present both sides" just as you have here and everything will (journalistically) be fine. We all know about Goldman's relationship with the State of New Jersey--did the state even file a complaint afterwards? anywho--"it's a theleron moment." as in "Captain, i noticed something else in the tertiary band of the radioactive emmitters, sir." Captain..."what is it Jordie?" Captain's engineer Jordie: "it's theleron, Captain." Captain: "THELERON! That was banned from the Federation YEARS ago!"
actually now that CNBC is in the tank i've been working on a complete "script rewrite" for the show. instead of "the usual we're friggin' serious here" thing--i'm going for the set of "Star Trek, CNBX Generation." First off--"the uniforms are a must." Second guests will appear "ON SCREEN!" (1st Officer Becky Quick: "We are approaching Planet Buffet sir." Captain Joe Kernan: "On Screen!") Third "we are bombing around the economic galaxy here and going WHERE NO FINCANCIAL JOURNALIST HAS GONE BEFORE!" (Cue to Star Trek theme music.) Whatdaya'll think? Give 'em a little "Zero Hedge?"
traderjoe,
I am not here to engage in a pissing contest with you and other Big Swinging Dicks. I know of top hedge funds and at least one pension fund manager here in Montreal who made excellent returns on 2-yr Greek bonds, riding them all the way until April (got out before the latest crisis). As for solars, I've been getting hammered lately but mostly made money over the past year trading them. At least I have the balls to make calls publicly which is more than I can say about you. Five years from now, LDK Solar's chart will look like LVS's current five year chart. Now, instead of shitting on me, can you give me one recommendation of yours?
As for the seed fund, I can guarantee any large sovereign wealth fund or pension fund that the managers I have to recommend to them are top in their strategies and can offer them managed accounts if they are willing to fund them properly.
Nice piece Leo.
yup great post. Not sure if its time to get long, this is classic holiday reversal. Maybe that will show after memorial holiday on MONDAY as the market is closed. Time will tell on tuesday next week. This week was a slop fest on the market ey?
I have been following the guy from http://www.forecastfortomorrow.com/Trading-Club he has been spot on gives live video updates and his seasonality stuff is killer. Well worth a look.
I say, I say boy... the article isn't talking about short term moves in the market! Rather, the long term viability of having hedge funds as a long term asset class for pension funds. (and giving some credit to Canadian alt mgrs.) You're a chicken hawk... (thx for the link Foghorn. : ) )