Posts filed under “Hedge Funds”

Last August, we called out the San Diego County retirement fund for paying way too much in fees to Salient Partners, its outside pension-fund manager. Based on reporting by Dan McSwain, the San Diego Union-Tribune alerted readers to a dramatic increase in the use of leverage once Salient took the reins.

On July 16, the county fired Houston-based Salient, according to the Union-Tribune.

Last year’s events made for a great local comparison between San Diego County and the City of San Diego. The two local municipal regions each have a separate retirement system for employees.

The county system was highly leveraged, expensive and performed poorly. According to Wilshire Trust Universe Comparison Service, San Diego County’s returns ranked in the 84th percentile among public pension funds during the three years to Dec. 31, 2014, and in the 54 percentile for the five-year period.

The county had hired Salient to goose returns; it increased leverage threefold to 100 percent of the assets in the fund. For this high-risk strategy, Salient Partners was paid $8 million a year.

As we noted last year, contrast this with the local competition, the City of San Diego, which had its own pension problems a decade ago. After fraud and conspiracy indictments in 2006, and Securities and Exchange Commission charges in 2008, it cleaned up its act.

The City of San Diego simplified its pension plans. It barred the use of leverage in favor of a low-risk, asset-allocation approach. As we discussed last year, it is reaping the rewards. The city’s fund has outperformed the county’s, earning about 13.6 percent a year versus Salient’s returns of 10.1 percent since it was hired in October 2009 through June 2014. That’s before fees; the city’s net returns with its lower cost-basis, look even better after fees.

By contrast, San Diego County spent $103.7 million in investment and administrative fees in 2013. The $10 billion pension fund is one of the highest-cost plans in the country as a percentage of assets.

In April 2014, pension board members voted unanimously to approve the highly leveraged-investment strategy. Raising risk to increase gains seems contra-indicated for long-term investors who won’t have access to their funds for decades.

Pension fund directors Dianne Jacob and Samantha Begovich first proposed ending the arrangement 10 months ago but couldn’t win a majority vote of fellow board members to bring fund management back to in-house investment professionals.

The combination of high costs and even higher risks led to the termination. As reported by Union-Tribune:

 Salient had been collecting more than $8 million a year to manage the county portfolio . . . [The firm's] fondness for so-called alternative investments like credit default swaps and derivatives at one point exposed the fund to potential losses of more than double the portfolio value. A worst-case event could have lead the county to lose its entire fund and owe billions more. (Emphasis added)

To reiterate our conclusion from last year: A city, county or municipality that fails to appropriately fund its pension plan isn’t honoring its fiduciary obligation to its employees and retirees. Not saving enough to meet its retirement obligations shouldn’t be an excuse for risky behavior or using additional leverage.

There is no free lunch. Instead, pension funds should keep it simple, manage a basic global allocation of assets and watch costs. There simply is no reason to try to reinvent investing when there is a perfectly viable and preferable option.

(Note: Corrects fourth paragraph of article published July 17, which said that San Diego County’s pension-fund returns ranked in the 84 percentile among funds for the past three- and five-year periods. The fund’s three-year returns ranked in the 84th percentile for the period ended Dec. 31, 2014, while five-year returns ranked in the 54th percentile. Also corrects Salient Partners’ annual management fee in fifth paragraph to $8 million rather than $10 million, and the fund’s average annual returns in the seventh paragraph to 10.1 percent not 9.7 percent.)



Originally published as: A Pension Fund Comes to Its Senses



Category: Asset Allocation, Hedge Funds, Really, really bad calls

The Wit, Wisdom, and Unapologetic Vitriol of Carl Icahn

click through for full article Source: Bloomberg

Category: Hedge Funds, Humor

The Trouble with Macro

Markets around the world start the week bracing for trouble as Greece spirals further into crisis. Can the country avoid a full-blown default? Will there be a Grexit? Will it stay in the euro zone and keep the single currency? It all looks like an unknowable gamble. Which leads us to this question: How big a challenge is it…Read More

Category: Credit, Hedge Funds, Investing, Really, really bad calls

Fool-proof Logic

Source: Washington Post

Category: Hedge Funds, Mutual Funds, Really, really bad calls

Ray Dalio’s World View

Ray Dalio’s world view

Fareed talks to Ray Dalio, founder of the largest hedge fund, about his success and his views on the global economy.

Click for the video.

Source: CNN

Category: Hedge Funds, Investing, Video

Reform of NYC Pension May Follow CALPER’s Script

People seem to be genuinely shocked by a new report out of New York City’s Comptrollers Office. The report found that the city’s public employee retirement fund pays big fees to Wall Street but gets little in return. However much anyone is shocked, they really shouldn’t be. That’s because the high cost of hiring outside…Read More

Category: Hedge Funds, Investing, Venture Capital

AQR & Cliff Asness’ Disclosure

Later this week, I am interviewing Cliff Asness for Masters in Business. While doing some prep work for the show, I came across this delight: The Cliff Asness Disclosure document:   Cliff Asness Disclosure: The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management,…Read More

Category: Hedge Funds, Humor, Legal

The Amazing Disconnect Between Hedge Fund Performance & AUM

Earlier this week, Greg Zuckerman of the Wall Street Journal pointed out one of the great mysteries of today’s investment landscape: Despite underperforming by a substantial margin, hedge funds keep attracting more investors and assets under management. It is almost as if (to borrow the headline on Zuckerman’s article), “Hedge Funds Keep Winning Despite Losing.”…Read More

Category: Asset Allocation, Bad Math, Hedge Funds, Investing, Psychology

The Trouble with Hedge Funds

Over the past few years, I have spilled quite a few pixels about issues with Hedge Funds from an investor’s perspective (See e.g., this, this, this, this and this). My 4 primary complaints are 1) Poor performance; 2) High Fees; 3) Inflated — phoney really — expected returns; and 4) Mis-classification of HF as an…Read More

Category: Hedge Funds

Hedge Fund Feast or Famine?

This has turned out to be a year of milestones for the hedge-fund industry. It is a tale we have chronicled all year. As markets barrel into the end of the fourth quarter, it’s worth reviewing the highlights from this year to see if we can deduce what might be in store for the 2&20…Read More

Category: Hedge Funds