While we have already noted the backlash against hedge funds as a result of their chronic underperformance of the market over the past 5 years, resulting in first Calpers [6]and now Texas Pensions [7]to pull money out of the asset class, the reality is that in a micro-managed world in which the Fed itself is the Chief Risk Officer of the S&P 500, there is no need to actively manage assets - after all the money printer itself is doing so on behalf of everyone. However, it is not just highly paid hedge funds - paid highly to hedge risk which simply does not exist until such time as central banks lose control - but pension, mutual and virtually every other class of actively managed money will underperform the S&P as long as the central banks are actively pushing asset values higher (and when they stop watch out below because no amount of shorts or puts will offset the carnage that will result).
And yet some, such as Pension funds, have a specific bogey they have to hit every single year, in order to maintain a mandated increase in their assets or else suffer the wrath of disgruntled pensioners and overseers.
Which probably explains why as Pension360 reports [8], the Chief Investment Officer of one such pension fund decided to do the unthinkable: daytrade, i.e. gamble, its assets, which happen to be the lifetime savings of hard workers who just happen to be naive enough to believe their retirement money is entrusted into safe hands. Little did they know that instead they have handed the fruit of their lives' labor over to the E-trade baby.
And if that was not bad enough, the CIO intends to use as much as 500% leverage. While daytrading.
[9]
Here is Pension360.org [8]'s account
There are few, if any, pension board meetings as drama-filled as the ones that have taken place this month at the San Diego County Employees Retirement Association (SDCERA).
The fund’s trustees have been debating a strategy allowing extensive use of leverage in the fund’s investments. Such a strategy was proposed to increase the fund’s below-average investment returns. But if it backfires, it could evaporate the fund’s assets.
The man behind the plan is outsourced chief investment officer Lee Partridge, to whom the fund has given near total control over investment decisions.
Partridge has the authority to leverage certain investments up to 500 percent – without the permission of the fund CEO or anyone else.
Now, some board members are asking whether Partridge is participating in day trading with pension assets. The exchange, as reported by the San Diego Union-Tribune [10]:
At the Sept. 4 board meeting, new board member Samantha Begovich asked Partridge if he was day-trading, the speculative investment practice that can result in heavy profits or losses by the hour.
“Tell me how it is prudent to take our $10 billion and risk it to $20 billion,” she asked, using dollar bills to illustrate her point about the potential to lose the entire fund and billions more. “We as trustees have to comply with a prudent investor standard.”
Partridge’s response [10]:
Partridge said he invests and trades on a daily basis, but said it is done to balance risk, not to seize on minute-by-minute market changes. The strategy is extremely unlikely to drain the county portfolio, he said.
“We’re not trying to time the market,” said Partridge, whose one-man consultancy merged with Salient Partners in 2010. “We’re trying to maintain the intended level of exposure at all times so we’re not running too hot or too cold.”
More on the authority given to Partridge [10] to leverage investments, From the San Diego U-T [10]:
Under authority already granted to Partridge, the consultant can risk five times the value of “risk-parity” assets — capped at 20 percent of the portfolio — without notifying pension system CEO Brian White.
White also recommends Partridge be given leeway to invest 5 percent of the fund in “managed futures” that could be leveraged fourfold without independent approval.
There is also a real-estate component that Partridge can leverage to 200 percent without advance permission.
Because the investments are secured by the overall portfolio, a worst-case scenario could see the fund evaporate and leave the county owing billions more.
The board is also debating whether to retain Partridge’s services. The CEO of the fund, Brian White, has recommended a contract extension through 2021. The board also gave Partridge a 25 percent raise back in June.
SDCERA returned 13.4 percent in the fiscal year 2013-14, according to its annual report.
Meawhile, CalSTRS and CalPERS both returned over 18 percent.
