Teachers Unions Vs Hedge Funds: The Battle Over Billions

Randi Weingarten is the president of the American Federation of Teachers, and is a name that hedge fund managers and those on Wall Street are beginning to learn quite well.

About a decade ago, some liberals joined conservatives in pushing to expand charter schools. As the WSJ reports, those efforts received financial support from hedge fund managers including Dan Loeb, Paul Singer and Paul Tudor Jones, who together kicked in millions of dollars toward the effort. Some involved in the effort to push for the expansion of chartered schools portrayed public school teachers and their unions as obstacles to improving education, and thus the reputation of unions took a beating.

Enter Randi Weingarten. Weingarten was elected president of the American Federation of Teachers in 2008, and her aim was to restore public trust in public school teachers and their unions. Weingarten's federation represents about two dozen teachers unions whose retirement funds have a total of $630 billion in assets, a large portion of the more than $1 trillion controlled by all teachers unions according to the WSJ. Although the unions themselves control where the money is invested, Weingarten can make recommendations.

Weingarten instructed investment advisers at the federation's Washington headquarters to sift through financial reports and examine the personal charitable donations of hedge fund managers, focusing on those who want to end defined benefit pensions, and entities backing charter schools and the overhauling of public schools. In early 2013, the union federation published a list of roughly three dozen Wall Street asset managers it says donated to organizations that support causes opposed by the union, and the federation wanted union pension funds to use the list as a reference guide when deciding where to invest (or not invest) their money.

Said otherwise, if asset managers don't support unions, the unions won't invest with the funds.

The Manhattan Institute for Policy Research, a think tank that supports increasing school choice and replacing defined benefit pension plans with 401(k)-type plans is one of the groups that wound up on the list. Lawrence Mone, its president, said the tactics amount to intimidation, and that "I don't think that it's beneficial to the functioning of a democratic society."

To signify the importance of Weingarten's list, after KKR & Co. president Henry Kravis made the list in 2013, Weingarten received a call from Ken Mehlman, an executive at KKR. Mehlman said KKR had a record of supporting public pension plans, and Weingarten agreed - KKR was then taken off the list. Cliff Asness of AQR Capital Management went as far as hiring a friend of Weingarten and paying $25,000 to be a founding member of a group KKR was starting with Weingarten to promote retirement security. Asness was removed from the list.

Asness continued to serve on the board of The Manhattan Institute, however in September of last year an aide to Weingarten spoke to a California State Teachers' Retirement System (Calstrs) official about Asness's continued service - one phone call later and Asness said that he was stepping down from the Manhattan Institute board.

One hedge fund manager has been more combative however - Dan Loeb. The founder of Third Point is a donor to the Manhattan Institute and chairman of the Success Academy, which operates a network of charter schools in New York City.

A bit more combative is an understatement - Loeb pushed back on Weingarten, and didn't seem to care about the influence she had over where funds were directed.

As the WSJ explains

In a March 2013 letter to Mr. Loeb, Ms. Weingarten noted his support of a group “leading the attack on defined benefit pension funds” and said she was “surprised to learn of your interest in working with public pension plan investors.” Seeking business from union pension funds while donating to the group, she wrote, “seem to us perhaps inconsistent.”


The two agreed to meet.


Mr. Loeb emailed Ms. Weingarten, noting his fund’s average annual return of 21% over 18 years. “I completely respect the political considerations you may have and understand if other factors dictate how funds are allocated,” he wrote.


A week later, Ms. Weingarten wrote back to reiterate that unions were wary of investing with Mr. Loeb “given the political attack on defined benefit funds.”


In response, Mr. Loeb asserted that it must be “frustrating” for unions to invest with funds that “have different political views or party affiliations.” He added: “At least we can rejoice in knowing that as Americans we share fundamental values that elevate individual opportunity, accountability, freedom, fairness and prosperity.


The meeting was called off, and Mr. Loeb was added to the list.


At a fundraising dinner that May for his charter-school group, Mr. Loeb stood up and said: “Some of you in this room have come under attack for supporting charter-school education reform and freedom in general.” He called Ms. Weingarten the “leader of the attack” and pledged an additional $1 million in her name.


“Both Randi and I believe America’s children deserve a 21st century education, and I hope the day comes when she embraces the positive change created by public charter schools,” Mr. Loeb said recently in a written statement.

As part of the punishment, Loeb eventually lost $75 million from a Rhode Island pension fund. Around that same time, a giant billboard appeared above Times Square that was not kind to Weingarten - perhaps not a coincidence.

"We all guessed it had to be people like Dan Loeb" Weingarten said.

After the billboard, Weingarten and the union group launched an advocacy group called Hedge Clippers, that lobbied against proposed New York legislation to increase the charitable deduction for donations to public and private schools. The group also published a report called "All That Glitters Is Not Gold," that among other things, claimed that the high fees charged by hedge funds made them unattractive investments. Furthermore, the union group is funding a campaign to eliminate the carried interest tax rate on investment income earned by asset managers, as well as filing a class action lawsuit accusing 25 Wall Street firms of violating antitrust law and manipulating Treasury bond prices.

Other large pension funds such as an Illinois public pension fund and one of New York City's public pension funds have cut hedge fund investments. However, Loeb may have had the last laugh, as when Weingarten tried to convince a large Ohio fund to follow suit, it voted to remain invested in hedge funds, including Loeb's.

* * *

Regardless of a stance on this topic, this battle between Weingarten and the targeted hedge funds such as Third Point will remain an epic story to watch unfold. Also, as readers know, pension funds are severely underfunded, and given that NIRP and other insane central bank policies have created an environment where risk assets are a necessity if one wants to generate higher target returns, hedge funds may be one avenue that pension funds need to consider, whether the funds support charter schools or not.