Skip to content
Link copied to clipboard

PhillyDeals: Public pension plans pay hedge-fund fees with little gain

Struggling to raise cash for future pensions without bigger taxpayer bailouts, state workers' and teachers' retirement plans in the last dozen years or so have sought higher returns by betting on "alternative" investments not traded on public markets: hedge funds, real estate, private equity.

"This is public money. This needs to be transparent. It is very difficult to find out, through their own reporting, what the actual fee structures are." - Pennsylvania Auditor General Eugene DePasquale
"This is public money. This needs to be transparent. It is very difficult to find out, through their own reporting, what the actual fee structures are." - Pennsylvania Auditor General Eugene DePasqualeRead more

Struggling to raise cash for future pensions without bigger taxpayer bailouts, state workers' and teachers' retirement plans in the last dozen years or so have sought higher returns by betting on "alternative" investments not traded on public markets: hedge funds, real estate, private equity.

Hedge-fund managers have collected billions in fees, but their returns have mostly trailed stocks in recent years. The largest U.S. pension plan, the California Public Employees Retirement System, plans to dump its $4 billion hedge-fund portfolio, citing "complexity, cost," and the difficulty of buying enough good ones.

Hedge funds were supposed to make money even when stocks didn't, but they lost money when stocks went down in 2008.

Nicholas Maiale, who chaired the Pennsylvania State Employees' Retirement System (SERS) when it started buying hedge funds in 2002, says he has "soured" on the class.

(Maiale feels better about private-equity funds, whose values rose with stocks in the recent bull market.)

It is tough for civilians to track what the state is getting from these high-fee investments. Unlike with stock and bond managers, pension plans don't post each alternative manager's yearly performance. Aggregate results for alternative-asset portfolios include managers' estimates of what their investments might be worth some day.

It's also hard to track the fees that managers collect, says Pennsylvania Auditor General Eugene DePasquale, who wants SERS and the Public School Employees' Retirement System (PSERS) to disclose more about their $7 billion in hedge funds.

"This is public money. This needs to be transparent," DePasquale told me. "It is very difficult to find out, through their own reporting, what the actual fee structures are."

"There is no uniform reporting" for state pension assets, Evelyn Williams, spokeswoman for PSERS, told me. "It is nearly impossible to compare the value of fees paid among various pension funds."

SERS, for example, signed an agreement with the hedge-fund manager Tiger Keystone Partners to prevent "the economic terms of this Agreement and any sensitive investment or financial information from public disclosure," when it invested $250 million in Tiger in 2012.

In its annual "Investment Program Expenses & Fees" report to state legislators, SERS does not list any fees paid to Tiger, even though a consultant report, circulated to the pension's board members but not published, lists "management fees" totaling $5.5 million and "incentive fees" totaling $5.7 million as paid to Tiger in 2012 and 2013. SERS staff declined comment on the consultant report.

PSERS reports some but not all the fees its alternative managers collect. Private-equity and hedge-fund managers are typically paid annual management fees of up to 2 percent of the money they invest, plus 20 percent of the investment's profits above a basic target. Fund managers call that 20 percent they collect "carried interest," and cherish it, since the government taxes it as capital gains, at lower rates than other income.

Hedge-fund managers typically collect carried interest each year. PSERS reports their carried interest along with management fees. But private-equity managers tend to let carried interest mount until their funds are liquidated years later; PSERS doesn't report what those managers collect.

New Jersey, similarly, does "not include carried interest earned by private equity and real estate managers," in reporting pension manager fees, state Treasury spokesman Christopher Santarelli told me.

Why should citizens care if pro investors get rich, as long as the pension plan does all right?

Americans have long worried that people who make fortunes from public contracts may influence how government does business. Congress in 2010 banned money managers from collecting fees from states and towns where they donated cash to politicians.

The ban doesn't apply to donations to national political committees or candidates for Congress. Indeed, so many money managers give to national campaigns that "it would basically shut down the alternative portfolio if we were to go in that direction," Christopher McDonough, director of the New Jersey Division of Investment, told a state investment council meeting in September, according to my Inquirer colleague Andrew Seidman.

At the very least, we should know what we're paying them.