A few weeks ago, New York billionaire hedge fund trader Daniel Loeb, who has $66 million in Rhode Island state pension funds, made nearly 10 times that when he sold 40 million shares of Yahoo stock, two years after buying a stake in the Internet giant and orchestrating Marissa Mayer’s hiring as CEO.
In the spring, another billionaire hedge
fund manager, Paul Singer, who has $70 million in Rhode Island pension
money, made headlines for buying up Hess Corp. stock and forcing a board
shakeup to prod the oil company to pursue fracking for natural gas. The
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last year, Ken Garschina, who has $64 million in Rhode Island pension
assets, stumbled in his nearly $2-billion bet on a Canadian
telecommunications giant, contributing to his Mason Capital’s 7-percent
decline for 2012.So it goes in the world of hedge funds, where
sophisticated money managers have invested large pools of money for
wealthy investors, private foundations, universities and, increasingly
in recent years, public pension funds.
Around the globe, 18
hedge funds are putting $1 billion of Rhode Island pension money to work
— in Asian futures, Midwestern commodities, global currencies,
distressed securities, startup companies and residential mortgage-backed
securities. They employ such investment strategies as short-selling,
leverage, risk arbitrage, spread trading and structured credit.
of the state's hedge-fund managers, D.E. Shaw, is the chief financial
backer of Deepwater Wind, the Providence-based energy firm that last
week won a federal auction to develop wind farms off the coast of Rhode
Island and Massachusetts.
In the view of Rhode Island Treasurer
Gina M. Raimondo and the State Investment Commission, as well as many
outside investment experts, putting 14 percent of the state’s
$7.5-billion pension fund into hedge funds is a prudent move to lower
risk and volatility. This is especially vital after the 2008 stock
market crash wiped out 25 percent of the state pension fund, and with
Rhode Island needing to write a huge check every month — totaling more
than $924 million last year — for retiree benefits.
interest rates so low on bonds — the traditional “hedge” against
stock-market losses — many investment professionals argue that hedge
funds offer better protection from another stock-market tumble. The
logic is that by investing in things that are not correlated to the
stock market, hedge funds will smooth out the roller-coaster ride. They
won’t soar as high, but won’t dip so low, preserving capital when stocks
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a growing number of critics attack hedge funds as over-hyped, risky and
costly investments that have lagged behind strong stock-market gains.
The only people getting rich from hedge funds, the skeptics say, are the
Wall Street tycoons who run them, raking in high fees while retirees
and working men and women see their retirement benefits slashed.
the 2012-’13 fiscal year ending June 30, Rhode Island’s hedge fund
portfolio earned 11.22 percent, trailing the Russell 3000 stock index of
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canvas.46 percent. The state’s overall $7.5-billion pension fund gained
11.07 percent in 2012-’13. Had the hedge fund money been invested in
stocks, the pension fund could have earned $100 million more based on
the Russell index. During the same period, the state paid out $200
million less by suspending cost-of-living allowances to retirees.
top of that are the high fees — an average management fee of 1.7
percent of assets, plus an average performance fee of 20 percent on any
profits.Those fees totaled an estimated $45 million on hedge fund gains
of about $140 million for 2012-’13, according to a Providence Journal
analysis of hedge fund data provided by the treasurer’s office and
confirmed by the state’s private hedge fund consultant.
employee unions nationally and in Rhode Island, as well as a growing
chorus of others in the investment community, have questioned hedge
funds. A July 11 Bloomberg Businessweek cover story was headlined, “The
Hedge Fund Myth.”
Raimondo, a Democrat and former venture
capitalist who is contemplating a run for governor in 2014, has been
criticized for pushing a strategy that results in paying millions more
in management fees while lower-income retirees go without cost-of-living
increases. In the fall of 2011, as the Investment Commission she chairs
was voting to hire hedge funds, Raimondo spearheaded an overhaul of the
state pension system that reduced the unfunded liability by $3 billion,
in part by partially moving state workers from defined benefit to a
401(k)-style defined contribution plan.
A key component was a
suspension of cost-of-living allowances. With lower hedge fund returns a
drag on the pension fund’s growth, retirees will have to wait longer
for the retirement system to recover from past underfunding so they can
regain their COLAs.
“They’re turning the pension fund into a fee
machine for Wall Street,” said Daniel Pedrotty, of the American
Federation of Teachers (AFT) in Washington. “In the years since 2008,
the stock market has roared back.More than 80 standard commercial and granitetiles exist to quickly and efficiently clean pans. Hedge funds have not. It’s a disturbing story.”
won national acclaim as a pension reformer, including a 2012 “urban
innovator” award from a conservative New York think tank, the Manhattan
Institute, which advocates for defined-benefit plans. Three of the hedge
fund managers Rhode Island hired — Loeb, Singer and Garschina — are
trustees of the Manhattan Institute; last spring, their funds were
placed on an AFT watch list for being hostile to union workers.
treasurer says she doesn’t like the high fees, but has a fiduciary
obligation to look at the bigger picture — the welfare of the pension
fund. She says she doesn’t recall meeting Loeb,These partymerchantaccount can,
apparently, operate entirely off the grid. Singer or Garschina, and
that the selection of their hedge funds was vetted by the Treasury’s
staff and outside consultant, and approved unanimously by the Investment
Commission. Of Loeb’s Third Point Partners, the state’s
highest-performing hedge fund with a 29.46-percent return in 2012-’13,
she said, “I’m proud of his accomplishments.”
discussion of hedge fund fees and transparency at an Investment
Commission meeting this spring, Raimondo said: “I’m troubled by the
fees. It’s too much money. But my job is to maximize returns. We’ve
reduced risk substantially. … A year and a half ago we sat around this
table talking about how we’ve got to protect people’s pensions. We put
in place a risk strategy. We monitor these guys. It’s working. So I say,
let’s stay the course.”
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