Friday, April 26, 2013

Teachers Put Hedge Funds in Detention?

Chris Tobe, founder of Stable Value Consultants, wrote an article for MarketWatch, Teachers put hedge funds in detention:
The Wall Street Journal reported last week that “the American Federation of Teachers listed 34 executives at hedge funds and other investment firms that help lead or make contributions to organizations with a hostile stance toward traditional defined-benefit plans.”

This is just the tip of the iceberg.

Many public pensions hold these hedge funds, such as the much maligned SAC Capital via a Hedge Fund of Funds. This is the case with the Kentucky Retirement System who owns SAC via the Blackstone Hedge Fund of Funds.

Rolling Stone's Matt Taibbi had highlighted Daniel Loeb of Third Point LLC (also listed by the AFT) in his blog article last week which caused an uproar and forced Loeb to withdraw from a scheduled speaking engagement at a Council of Institutional Investors conference.

The WSJ quoted Jay Rehak, president of the Chicago Teachers' Pension Fund. "They come to us with their hand out, and then they are stabbing us in the back."

This is not the first time that money managers have been called to the carpet for taking a hostile stance toward traditional defined-benefit plans. Blackstone strategist Byron Wien got in big trouble in 2010 for saying that retirement benefits were too generous.

Pete Peterson, a Blackstone co-founder, put millions behind think tanks that are hostile to DB plans and to an effort to cut Social Security benefits.

Record Currency management's (which did have Kentucky and is still with the Maryland Public plan) founder Neil Record is a leader in the United Kingdom in reducing Defined Benefit plans.

Pension politics continues to evolve and the next likely target is Private Equity — and as we all know from Bain Capital, is very likely to have the same issues.
Have to say, hedge funds and private equity funds should be frantically working behind the scenes to bolster defined-benefit plans. The institutionalization of the alternatives industry means the bulk of the $2.4 trillion managed by hedge funds is coming from large public pension plans.

Having said this, I don't agree with Chris Tobe's message above. I read Matt Taibbi's smear job on Daniel Loeb and thought it was sensational tabloid drivel. Loeb is arguably the best hedge fund manager alive and his fund has delivered outstanding returns to institutional clients which include many public pension funds.

Pete Peterson is the co-founder of Blackstone, one of the best alternatives fund in the world, but he retired a while back to focus on charities. True, the Peter G. Peterson Foundation is very much focused on reining in fiscal debt, and has proposed cuts to Social Security and other long-term entitlements (don't agree), but I can't find a single recommendation to abandon public defined-benefit plans. Most of the comments are just informational pieces pointing out the fiscal problems of state and local governments.

One thing I recommend to all hedge funds and private equity funds is to keep politics out of your business. Unions are growing increasingly frustrated by the constant attacks on defined-benefit plans and with good reason. Their members pay a lot  into these plans so they can enjoy the security and peace of mind that comes with a DB plan. The last thing they want to hear is some hedge fund or private equity manager who made it stinking rich by growing assets from their members' contributions publicly slamming DB plans.

And let's face it, hedge funds and private equity funds are in no position to slam anyone these days, especially the hand that feeds them. More articles are coming out shining a bad light on the hedge fund industry. Josh Brown wrote a  post on how hegde funds underperform more normal asset classes, stating the following:
Unfortunately, investors have plowed over $2 trillion dollars into the hedge fund complex under the misguided assumption that they'd be able to deliver alpha and absolute returns to juice performance. In actual fact, so-called "alternatives" have done the opposite for the vast majority of their investors.
And before you say "But what about what's his name?", bear in mind that the rare few hedge funds that have consistently posted great returns would never in a million years take money from you. And the odds of you identifying an emerging manager from the ground floor who becomes Paul Tudor Jones are about the same as you making out with Kate Upton in an outdoor shower on a Tahitian beach. There are amazing and talented fund managers out there - but even the fund of funds industry has been proven ineffective in terms of being able to sort them out from the rest.
There are excellent hedge fund managers out there, many of which I track every quarter, but Josh is right, most hedge funds are underperforming and the odds of identifying the next Paul Tudor Jones are slim to none. In fact, these are treacherous times for hedge funds and all active managers. Even great managers are struggling to deliver performance in this environment.

Had a conversation recently with a senior pension fund manager who invests with some of the world's best hedge funds. He told me that part of their due diligence is to look at the internal rate of return (IRR) and how it has evolved as assets grow. In his own words: "It's important to track the dollar-weighted return of these funds. We ask them data going back since inception. If a manager can't provide us with their IRR, we don't even look at them. Also, if  alpha is shrinking as assets mushroom, we flag it and review their performance."

This pension fund manager told me he read Simon Lack's book criticizing hedge funds, enjoyed many parts but he didn't agree with everything in the book. He thinks that hedge funds play an important part in an institutional portfolio and I agree. I'm also careful not to throw the baby out with bathwater when it comes to hedge funds as I think many commentators just do not understand their role in an institutional portfolio.

Hedge fund assets will only grow in the coming decade. A lot of the demand for hedge funds and other alternatives will be coming from Asia, which is why Paamco and other funds of funds are focusing their attention there.

Finally, today is my birthday so it's a good time to shamelessly plug my blog and ask many hedge funds, private equity funds, pension funds, big banks/ brokerages, unions, regulatory bodies and countless others who regularly read my comments to donate or sign up for a monthly subscription at the top right-hand side of the page.

I'm also looking into starting a consulting shop with a friend or joining an organization where I can continue doing what I love doing most, tracking pension fund investments and contributing positively to investment and asset allocation decisions across public and private markets. Please keep me in mind if you have any mandates for me. Wish you all a great weekend.

Below, Agecroft Partners Don Steinbrugge discusses hedge funds and his investment strategy with Deirdre Bolton on Bloomberg Television's "Money Moves." It's pretty much all about beta in Asia and elsewhere. Will be interesting to see if the facade of strength gives way this spring or if we get a rotation out of defensives into more cyclical sectors leveraged to global growth (pay attention to mining shares).

And Walkers Global Managing Partner Ingrid Pierce discusses start-ups and hedge funds with Deirdre Bolton on Bloomberg Television's "Money Moves."No doubt about it, breaking into the hedge fund world is getting harder than before, but if you think you have what it takes, go for it!