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Friday, October 31, 2008

More on SERS's secret hedge fund losses

  Robert Innis, CFA, of Yardley sent this thoughtful note on last Sunday's PhillyDeals column, re the Pennsylvania State Employees' Retirement System's massive investments in secretive hedge funds and private equity funds:

  "I applaud you on your article about SERS's investment strategy.  As a former investment officer for the State of New Jersey (before the problems) I sort of understand the mental attitude that the Chief Investment Officers and other top officers have toward outsiders.  They are bombarded with more people wanting something or offering advise, that they can't really think.  Then they go into a shell and won't say anything because they already know all of the answers.  However, most of the individuals don't have any real investment experience outside of their jobs, which they have held for many years.

  "I don't like the idea that a taxpayer like me is really the insurance company to the investment returns.  I feel that the investment pool should be managed conservatively and not try for "home runs".  I learned that SERS and other public funds were heavily invested in hedge funds and I scheduled a meeting with my State Representative and brought a hedge fund salesman from my previous job to help explain how they worked.  The Representative, who I personally know, wasn't very receptive because he said that he really didn't understand investments.  His expertise was in other areas of government, but he did meet with SERS's people and was given a "snow job".  Essentially, they just smiled and said everything was "OK".  Now that was about 3 years ago, so nothing has changed.
 
   "I have stated to others that the pension fund would be wise to have only 5% of their assets invested in hedge funds, while SERS has about 30%.  My allocation for real estate and emerging markets would be less than 10% each.  I would hold most of the funds in 'old-fashioned' stocks and bonds, like we did at the State of New Jersey in the 80's. 
 
   "As far as Gov. Ridge allowing higher pensions for new hires, this should be done when there is a surplus and actuarially correct.  Politicians always seem to make these "generous" offers when they are about to leave office.  The new governor is then stuck with figuring out how to pay for it.
 
  "I don't know what the answer is but the State could do what many other companies with large pension obligations do, and that is to disband the pension system and force all employees to obtain their own 401K (or what ever public employees have) and let the investments to others.  As a tax payer, I don't like the risk I am forced to have.
  
  "By the way, a recent Barron's magazine had interview with Jeremy Grantham, and was very interesting, as he is still quite bearish.  He said that "half of all hedge funds would go out of business" before the end of the bear market.  If he is accurate, then the public pension funds that heavily invested in those funds will be in deep trouble.
 
  "One more thought: there was a time that professional investors believed that hedge funds actually hedged risk.  Your upside returns wouldn't be a great, but the downside blast wouldn't be as devastating.  Now it seem that hedge funds are defined as funds that are 'swinging for the fences'. "

See the column (cut and paste) at
http://www.philly.com/inquirer/columnists/20081026_PhillyDeals__No_telling_how_crisis_thumped_SERS_fund.html
Posted by Joseph N. DiStefano @ 8:33 AM  Permalink | Post a comment
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About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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