Monday, March 31, 2014

Is the U.S. Stock Market Rigged?

Steve Kroft of CBS 60 Minutes reports on a new book from Michael Lewis that reveals how some high-speed traders work the stock market to their advantage:
This month marks the fifth anniversary of the current bull market on Wall Street, making it one of the longest and strongest in history. Yet U.S. stock ownership is at a record low and less than half of Americans trust banks and financial services. And in the last two weeks, the New York attorney general and the Commodities Futures Trading Commission in Washington have both launched investigations into high-frequency computerized stock trading that now controls more than half the market.

The probes were announced just ahead of a much anticipated book on the subject by best-selling author Michael Lewis called "Flash Boys." In it, Lewis argues that the stock market is now rigged to benefit a group of insiders that have made tens of billions of dollars exploiting computerized trading. The story is told through an unlikely cast of characters who figured out what was going on and have devised a plan to correct it. It could have a huge impact on Wall Street. Tonight, Michael Lewis talks about it for the first time.
I will let you watch the clip below. I never heard of Brad Katsuyama, the young trader at the Royal Bank of Canada who first realized that the market that he thought he knew had changed. I wish him a lot of success in his new venture at IEX and hope all the large investors that read my blog will support this new exchange.

Zero Hedge is the blog that first talked about high-frequency trading back in March 2009 (they love reminding us in their typical self-promoting style). I have written a few comments on high-frequency trading and wrote all about the Knightmare on Wall Street, the Wall Street Code, the Real Wolves of Wall Street and Wall Street's License to Steal.

I haven't read Michael Lewis' book, Flash Boys, and not sure if I will buy it. One thing is for sure, if he didn't interview Haim Bodek, he didn't do his homework. In fact, I'm shocked at how sloppy 60 Minutes is becoming in their reporting. How the hell can you discuss high-frequency trading and not interview Haim Bodek? He is the undisputed master of high-frequency trading and has done more to expose the inner workings of the U.S. stock market than anyone else, including Brad Katsuyama. This report by 60 Minutes was very sloppy and nothing more than a big promotional plug for Lewis' new book.

So is high-frequency trading a serious threat? Yes and no. Proponents will argue that they provide much needed liquidity and while this true, the reality is high-frequency traders are wreaking more havoc than the benefits they claim to provide. They are frontrunning large and small investors, clipping billions in profits in the process. There is no transparency and fairness in the current system dominated by high-frequency traders, which is one reason why I keep telling politicians to bolster defined-benefit pensions for everyone. Shifting employees to defined-contribution plans in this market is literally feeding them to the wolves.

And high-frequency trading isn't just about the stock market, it's happening all over, including bonds, currencies and commodities. But the stock market is what garners all the attention because most people invest in stocks and expect there to be a level playing field.

I see high frequency bullshit every day trading my own stocks. Check out the volatility on Idera Pharmaceuticals (IDRA) in the last week (click on image):

It's absolutely crazy and I tell my friends and anyone trading these small biotechs, if you can't withstand crazy volatility, don't bother investing, you will suffer severe anxiety attacks! The same thing happened with solar stocks, the high frequency assholes pounded them to oblivion so the insiders can buy them on the cheap and then, "BOOM!," they ran them up hard!

By the way, I don't buy the nonsense that the bubble in biotechs and solars is over. There is a serious correction going on in biotechs as you can see by looking at the IBB and XBI ETFs (you're better off sticking with ETFs if you want to play biotechs and not worry as much about individual companies). I stick by my Outlook 2014 and hot stocks of 2013 and 2014 and guarantee you the big boys bought the latest biotech dip really hard, setting themselves up nicely for the next biotech beta move.

It's also worth noting the line between pension funds, mutual funds and high-frequency traders is blurred. For example, Ontario Teachers' Pension Plan and the Caisse invest in Citadel, a well known elite hedge fund that engages in high frequency trading. Fidelity and other large mutual funds also use high frequency traders to unload or buy stocks. In other words, it's not as clear cut as people think.

Finally, how should individual investors react to all this hoopla of the U.S. stock market being rigged? My advice is to ignore it and read my comment on why market timing is a loser's proposition. Let the high frequency-traders engage in intellectual masturbation, effectively cannibalizing each other in a loser's game. The best way to beat them is to follow the Oracle of Omaha and buy a few great companies and stick with them through market cycles.

Below, watch the 60 Minutes clip looking at whether the U.S. stock market is rigged. I prefer the fascinating and revealing documentary from VPRO about Haim Bodek, aka "The Algo Arms Dealer," a genius algorithm builder who dared to stand up against Wall Street. After watching this documentary, you will gain a better understanding of how "quants" have forever changed the financial landscape, for better or for worse, and how your pension contributions are their "dinner or low hanging fruit."

Postscript: Read my follow-up comments on The Great HFT Debate, which turned out to be a total dud and why dark markets may be more harmful than high-frequency trading.

Friday, March 28, 2014

Do Pensions Pay Political Dividends?

Martin Regg Cohn of the Toronto Star reports, Ontario Pension Plan may pay political dividends:
Beyond the usual rhetoric, a most unusual platform is taking shape in the Liberal campaign shop. Ahead of a possible spring election, Premier Kathleen Wynne has seized on a sleeper issue for her political revival:

Pension reform.

Improbably, pensions now dominate her political speeches. Her strongest attack lines have targeted Prime Minister Stephen Harper for blocking Canada Pension Plan improvements.

“If you (Harper) won’t lead the way, then get out of the way,” she told cheering Liberals at a weekend convention.

“We must act now to stave off crisis in our retirement income system,” Wynne exhorted donors at a major party fundraiser 48 hours before.

Wynne is right to lament the lack of federal leadership on CPP improvements. Building a new Ontario Pension Plan is worthy public policy.

But is it a political winner?

The answer could be heard at an invitation-only seminar convened this month by HOOPP, the Healthcare of Ontario Pension Plan. One of several retirement funds with massive assets and minimal profile, it keeps delivering stellar returns with admirably low fees.

Now HOOPP is of a mind to share its bounty with the rest of us — not its wealth, but its wisdom. The audience got a sneak peak at some revealing public opinion research compiled for HOOPP that paints a picture of voter anxiety.

Two-thirds of Ontarians worry about having enough money in their old age, and 86 per cent believe there is a retirement income crisis. About seven in 10 say employers are failing to deliver reliable pensions, and blame government for not doing enough.

Eight out of 10 say they want a pension that pays a guaranteed amount (defined benefit), as opposed to “defined contribution” schemes that are glorified savings plans.

One of the more noteworthy aspects of the presentation was the presenter, pollster David Herle, who was hired by HOOPP a few years ago to research public attitudes. These days, Herle wears another hat as Wynne’s campaign manager and chief strategist.

Little wonder Wynne has hit on public pensions as her personal salvation.

Herle clearly believes the new Ontario Pension Plan she’s cobbling together is good politics. It could also be good government.

That seems to be the shared verdict from HOOPP president Jim Keohane, who followed Herle at the microphone. Keohane, who is also serving as an adviser to the Wynne government on a new Ontario pension, brought the perspective of a seasoned financial analyst to the debate.

Without major reforms, a wave of retirees will require social assistance, becoming a burden on taxpayers, Keohane warned: “You can pay me now or you can pay me later, but the cost of paying me later is much higher.”

So-called “defined contribution” (DC) savings plans that are displacing traditional pensions in the private sector will leave people vulnerable. For example, anyone trying to try to convert their DC savings into an annuity during the 2008 financial crisis would have received dismal interest rates for the rest of their retirement years. By contrast, someone retiring with a traditional pension plan from HOOPP would benefit from inter-generational risk-sharing to ensure a constant payout, in good times or bad.

Keohane notes that HOOPP’s pensioners — retired nurses, orderlies and caregivers — don’t have gold-plated pensions. They get an average $23,000 annually, thanks to a fund that has delivered returns of 10 per cent annually compounded over the past decade while charging a mere 0.3 per cent for expenses (compared to management fees that can be 10 times higher for private sector retirement funds).

Can the HOOPP model, and those of other successful public pension funds for teachers and municipal workers, be emulated in the province-wide fund that Wynne is proposing?

“All the preconditions are there,” Herle believes.

We’ll soon see if the political conditions are there, too.
I met David Herle last week when I attended the HOOPP conference on DB pensions. He's a smart guy who understands the plight of working class Canadians. David is a principal partner with The Gandalf Group, and they routinely poll Canadians on their major concerns.

David is also managing Premier Kathleen Wynne's political campaign. Not surprisingly, she's been on the attack lately, harpooning Harper on pension reforms. I personally think she's too nice and diplomatic. It's time she really sticks it to the feds, get the new DB pension plan up and running and keep slamming the Conservative buffoons who pander to banks and insurance companies or dumb lobby groups like the CFIB, warning Canadians of a two-tier pension system.

When you're playing politics with Harper et al., you have to be ruthless and vicious. You need to hammer them with the facts on the benefits of DB pensions for our retirement system and for the health of the overall economy.

I have strong opinions on pensions and I am willing to debate anyone publicly on what needs to be done. Who the hell am I? My name is Leo Kolivakis and by the time I am done, everyone will know me as Mr. Pension Pulse or Mr. Pension Prick (pick one or the other; I couldn't care less). I've been pounding the table on pensions for years and unlike others, I'm not scared of exposing the good, the bad and downright ugly on pensions.

I wrote an article for the New York Times recommending that U.S. public pension funds adopt independent, qualified investment boards so they can salvage their crumbling public pension plans. I agree with the Oracle of Omaha, the future for U.S. public pensions is downright ugly. U.S politicians typically ignore their pension dragon, until it's too late and the bond market forces them to act.

And let me be clear on something. I'm not a leftist, pro-union, type of guy. I'm pro DB pensions and more of a capitalist than Derek Murphy at PSP. Unlike the pension plutocrats at PSP and elsewhere, I make my living by eating what I kill and tweet about it on a daily basis (buy Idera Pharmaceuticals now and thank me when their Phase III results come out and blow Celgene out of the water!). There is no room for error in my investment portfolio and I've been burned so many times that I know how difficult it is to make money in these markets dominated by high frequency traders writing the Wall Street code.

Shifting employees to a defined-contribution plan is basically condemning them to pension poverty. America's 401 (k) nightmare is proof that the current system is a failure and it's far from over. The worst is yet to come but by that time, it will be too late. In many respects, it's already too late.

What we are witnessing now is the end phase of financial capitalism. I touched upon it when I went over New Jersey's Pensiongate. You have a bunch of rich and powerful hedge fund and private equity managers contributing to their favorite Democratic and Republican candidates in order to secure more money to manage from public pension funds relying on useless investment consultants shoving them into alternative investments. These pension funds are all praying for an alternatives miracle that will never happen. It's great for Wall Street, which effectively carries a license to steal, but not great for Main Street.

Let me be blunt. I love America and think it's the best country in the world. My grandfather fought with the U.S. Army in WWI and my grandmother received a pension from them even after he died. The U.S. has always been and will remain the tail that wags the global economy. But U.S politicians have to get their collective heads out of their asses and start implementing real reforms on their healthcare and pension systems, including reforms on governance that will bolster public pension plans.

One U.S. politician who gets it is Senator Bernie Sanders of Vermont. He's a bit too leftist and cooky for my taste but he brings up many excellent points and regularly tweets on income inequality. Here is one of his tweets which caught my eye (click on image):

And a lot of these rich hedge fund managers are collecting huge fees for delivering mediocre performance. They have basically become large, lazy asset gatherers profiting from dumb public pension funds paying alpha fees for beta or sub beta performance.

If you don't think America has an inequality problem, read this New Yorker article by John Cassidy, it will blow you away. Unfortunately, inequality in the U.S. and elsewhere will only get worse.

I leave you once again with a clip of Canadian doctor Danielle Martin schooling U.S. Senators a couple of weeks ago on the benefits of our healthcare system. She spoke at the American Congressional hearing about single-payer health care (Bernie's questioning killed me!).

I don't believe in a two-tier healthcare system and I don't believe in a two-tier pension system either. We should have well governed defined-benefit pensions for all our citizens. Please take the time to read Jim Keohane's speech which he delivered at the HOOPP conference on DB pensions. It's excellent and provides insights on what needs to be done to bolster defined-benefit pensions throughout the world.

Thursday, March 27, 2014

New Jersey's Pensiongate?

Lee Fang of The Nation reports, Pensiongate? Christie Campaign Donors Won Huge Contracts:
Four months into his first term, Governor Chris Christie stood at the podium of the Manhattan Institute, a conservative think tank, and laid out what was billed as the “Christie Reform Agenda.” To enthusiastic applause, the New Jersey governor railed against what he described as an out-of-control state public pension system. “Our benefits are too rich, and our employees aren’t contributing enough, either,” he said. “We are careening our way toward becoming Greece.”

Christie had just won his first statewide election with the help of Paul Singer, the hedge fund manager who chairs the Manhattan Institute. The month before Christie’s election victory in November 2009, Singer had given $100,000 to the Republican Governors Association (RGA), which aired a barrage of advertisements in Christie’s favor.

In that campaign, among Christie’s lines of attack against incumbent Democrat Jon Corzine was that he had mismanaged the state pension system and had unethically invested retiree money on Wall Street. “Jon Corzine made it easier for his friends from Wall Street to manage New Jersey’s pension fund,” blasted a “Christie for Governor” press release.

But once he was elected, Governor Christie moved to award big pension management contracts to the Wall Street donors who have helped boost his political fortunes. In his second year in office, Christie’s administration proposed giving Singer’s hedge fund, Elliott Associates, a contract to manage $200 million in state public pension funds. Elliott Associates won the contract in 2012. Singer again demonstrated his political loyalty to Christie in December 2013, shortly after Christie became chair of the RGA, a coveted post for GOP presidential aspirants. This time, Singer gave the group $1.25 million, making him the largest contributor that year and significantly enlarging the RGA’s war chest under Christie.

Another hedge fund manager with close political ties to Christie, Daniel Loeb, has also won big contracts to manage state retiree money under the governor, The Nation has found.

Before it was tarnished by Bridgegate, Christie’s political brand hinged on the governor’s celebrated efforts to reform the public pension system—including his moves to increase the retirement age for some workers, cut benefits, and make adjustments to how much state employees pay into the plan. Less noticed was how, under Christie, the amount of retiree money in the hands of outside managers, such as private equity firms or hedge funds like Singer’s, dramatically increased, while the share going to less risky and more traditional investments like treasury notes or the S&P 500 declined.

* * *

Like many of the characters in the Bridgegate scandal, a key player in the Christie pension cronyism story has roots in his hometown of Livingston, New Jersey.

Before Christie was named class president of Livingston High School, another ambitious young man, Robert Grady, held that title. Grady helped bring a teenage Christie into local politics by introducing him to his father, the mayor of Livingston. The younger Grady would become something of a mentor to the future governor: he introduced Christie to political leaders in Trenton and, later, to GOP leaders like Dan Quayle and Jim Baker. Bill Palatucci, who would become Christie’s law partner and close political adviser, also came into contact with Christie through Grady, according to an interview that Grady gave to the Eagleton Institute of Politics at Rutgers University.

Grady’s career, including a stint in the George H.W. Bush administration, eventually evolved into work in private equity. He spent a number of years at the Carlyle Group before becoming managing director of Cheyenne Capital, a Wyoming-based private equity firm. In 2010, Christie named him to the State Investment Council, which oversees New Jersey’s Division of Investment and has ultimate authority over how the pension funds get invested. He quickly became chair, an unpaid position of great influence. In an address to the Legislature last year, Christie personally thanked Grady for leading the pension system and investing the state’s money “wisely.”

“I think we’ve done a great job of having no politics in the system,” said Grady in an interview with The Nation. “We’ve kept the focus on maximizing returns for the beneficiaries while minimizing risk appropriately.”

But others argue that the close relationships between politicians, trustees, investment advisers and campaign contributors are a recipe for financial decision-making that puts private interests ahead of the public good. “There is no question that the current system in which politicians pick trustees, and trustees and their companies contribute to political entities that support the same politicians, is a type of institutional corruption that should not exist,” says Jay Youngdahl, an attorney and Network Fellow at the Edmond J. Safra Center for Ethics at Harvard University.

New Jersey law prohibits financial firms that manage state retiree money from contributing to state political campaigns. In 2010, the Securities and Exchange Commission also promulgated new rules to curb direct campaign donations to officials in charge of public pension programs. The regulations, however, do not necessarily cover the outside spending organizations—i.e., Super PACs—that have come to dominate recent elections.

The RGA—a 527 organization that can accept and spend unlimited amounts of money, much like a Super PAC, and that has frequently fueled the presidential bids of GOP governors—has allowed hedge fund managers to boost Christie’s political fortunes without running directly afoul of ethics laws.

In Christie’s first election as well as his re-election campaign last year, the RGA spent big to sweep him into office. In his first race for governor, the RGA provided a critical $5 million in outside spending on Christie’s behalf. In 2013, the group spent more than $1.7 million in support of Christie’s bid to defeat challenger Barbara Buono, a Democratic state senator.

Loeb, the founder of a hedge fund called Third Point and, like Singer, one of the most active GOP donors in the country, was also a major contributor to the RGA, donating $250,000 last year. Two years prior to Loeb’s donation, Christie appointees at the pension fund awarded Third Point a contract to manage $100 million in state retiree funds.

In 2011, Loeb and Singer reportedly joined other Republican financiers in what The New York Times dubbed the “Draft Christie committee” to urge the governor to run for president. At the time, Loeb’s fund had already commenced its contract to manage New Jersey pension money, and Singer’s fund had just been presented to the State Investment Council.

When asked about the contributions of Singer and Loeb to political groups supporting Christie, Grady said, “I’m not familiar with their giving, so I can’t really answer it. I’m aware the state has invested in them, and I’m sure the state has invested in many funds that have given to either party. But as far as who they’ve given to and what their conflicts may be, it’s not something that has come before our council and not something I’ve tracked.”

Grady, in fact, served as a strategist for the governor’s re-election campaign. How plausible is it that the man charting Christie’s long-term political future was unaware of the largest donations to a committee that Christie now helms, and which played a crucial role in financing his campaigns?

* * *

State pension plans that rely on hedge funds and other so-called “alternative investments” perform worse overall than those with more conservative strategies such as Treasury notes or the S&P 500, according to many studies, including recent reports from the Maryland Tax Education Foundation and Yale professor Roger Ibbotson. Critics charge that hedge funds not only are far more risky investments, but also that they produce less value because they carry hefty management fees and are entitled to a portion of future profits.

Early in his administration, Christie appointees at the Division of Investment pledged to double its allocation for “alternative investments,” with a goal of moving 33.2 percent of the $74.7 billion fund into an array of hedge funds, private equity firms and real estate deals. “For large pools of capital, I think it’s prudent to have both private equity and hedge funds as part of the mix of a diversified portfolio,” said Grady in 2010, shortly after voting to substantially increase the amount of New Jersey pension funds managed by hedge funds and other alternative investments.

“This started with Corzine,” says Hetty Rosenstein, head of CWA New Jersey, part of the Communications Workers of America, a union that represents many public workers in the state. “Many years ago, these investments were very conservative. But now they’ve changed that, and we’re invested in hedge funds and much more volatile investments from outside managers with high fees.”

According to industry reports, New Jersey now has the second-largest allocation in the country of state retiree money being managed by hedge funds. In 2013, the New Jersey pension program delivered a return of 11.79 percent—lower than the pension median of 16.1 percent that year. Part of the lower return, according to analysts, related to the amount allocated to alternative funds rather than to US equities. Fees also contributed to the smaller return. For example, hedge funds typically charge a 2 percent management fee on top of a 20 percent performance fee. The fees can quickly eat into any future gains, while making losses even more painful. In contrast, index funds or other, more traditional investments carry few (if any) fees.

A spokesperson for the Division of Investment disputed this characterization, claiming that any shortfall in the New Jersey pension fund’s performance in 2013 was the result of its relatively diversified portfolio, which has contributed to its steady performance in recent years.

But for critics, the long-term risks and the fees attached to alternative investments simply don’t justify the payoff. Chris Tobe, a former trustee of Kentucky Retirement Systems, estimates that outside money managers for the alternative investment program earned about $1.2 billion in management and performance fees from New Jersey’s public pension plan in 2013. “No wonder Wall Street loves Christie,” Tobe remarks. He estimates that in 2013 alone, Loeb’s fund collected nearly $5.2 million in fees from the New Jersey public pension fund, while Singer’s fund collected about $8.6 million.

The push for bigger investments in hedge funds was not a unanimous decision. James Marketti, a union representative on the State Investment Council, protested the move vehemently.

“I objected to the alternatives continually, because they are inherently more risky and certainly more corrupt,” Marketti says. He’s a retired former president of CWA Local 1032 and served on the board from 2008 to 2012 as the AFL-CIO Public Employee Committee representative. He says he presented research to the board on the fees associated with alternative funds, but he was also suspicious of finance industry cronyism.

“They all do business with that side of the universe,” Marketti says, pointing out that the Corzine and Christie administration appointees to the Division of Investment maintained cozy relationships with the same private equity and hedge fund managers that have won large state pension contracts.

* * *

The Christie administration’s embrace of exotic investment funds contrasts sharply with his rhetoric as a candidate, when he criticized Corzine’s experiment with alternative investments, which began in 2006. Christie called on Corzine to personally divest from TPG, a private equity firm that the state pension fund had invested in during his tenure. “It’s one thing for Jon Corzine to gamble with his own personal wealth, but it’s another to put at risk New Jersey taxpayer dollars by turning them over to his casino-license-holding partners at TPG,” said then-candidate Christie.

Christie campaign allies also went on the attack. Bill Baroni, a Republican politician forced to resign from the Port Authority over his role in the Bridgegate scandal, said Corzine’s decision to use pension fund money on alternative investments “opened up the door to the perception of politics.”

To watchdogs of state pensions, the Christie cronyism story is just the latest example of Wall Street gorging at the public trough. In Rhode Island, State Treasurer Gina Raimondo, a Democrat, has faced criticism for receiving political support from hedge funds that have been given large management contracts for the state pension program under her leadership.

“The huge increase in ‘alternative investment’ management fees over the past five years at public pensions has created multiple conflicts and potential for conflict,” says Tobe, a former whistleblower on fraud at the Kentucky pension fund and author of the book Kentucky Fried Pensions.

To other critics, the Christie administration’s management of the state pension program is characteristic of a governor who seeks to reward his friends, while sometimes ruthlessly punishing his opponents.

“This Livingston High School reunion thing that goes on with Chris Christie… David Wildstein, involved in Bridgegate—he went to high school with Chris Christie. Now you’re talking about Bob Grady—he goes back to high school with Chris Christie,” says Rosenstein. “He’s got these long-term relationships with people who then benefit enormously.”
So what is going on in New Jersey? Pretty much the same thing that's going on all over the United States. Democrats and Republicans receiving political contributions from rich hedge fund and private equity managers through the backdoor PACs and then paying them back by appointing some monkey bureaucrats at large public pension funds who are more than happy to increase allocations to alternative investments (sigh!).

Let me revert back to what I wrote a couple of days ago when I discussed the pension fund that broke all rules:
...the Tampa firefighters and police officers pension fund is relatively small, managing close to $1.8 billion. If they were managing over $100 billion, I guarantee you they'd be relying on useless investment consultants shoving them into hedge funds, private equity and they'd be praying for an alternatives miracle like the rest of the U.S. public pension fund crowd who are literally getting robbed blind feeding the Wall Street beast.

I wrote about this last week when I went over the hedge fund curse. Again, why the hell are you going to pay Ray Dalio or any hedge fund hot shot managing billions in assets a 2% management fee? These mega hedge funds have become large asset gatherers delivering beta, or in many cases, sub-beta performance and their managers get featured in Institutional Investor's Alpha magazine on "The Rich List."

These hedge fund hot shots aren't true entrepreneurs like Ray Kroc, Sam Walton, Bill Gates, Steve Jobs or the Koch brothers. They're just lucky investment managers who have become rich beyond their dreams because of dumb institutional clients paying them alpha fees for (sub) beta performance!

It's a joke. I was talking about it with a buddy of mine this afternoon. At least George Soros, the undisputed king of hedge funds, manages his own money. He doesn't need or want CPPIB, the Caisse or Ontario Teachers' as clients and he's happy making multi-billions managing his own money. He's living the real dream, the dream of freedom and not having to answer to some schmuck pension fund analyst like myself in my previous career.

But guys like Soros, Buffett and even this Mr. Bowen who I never heard of are an anomaly in a sea of mediocrity in the investment world. Good luck finding them and even if you do, there are no guarantees that even the best of the best won't suffer a huge drawdown. I have seen the rise and fall of plenty of hedge fund titans. When they're on top of the world, they're cocky, arrogant SOBs, reminding you how lucky you are to be invested with them. But when they fall hard, they put their tails between their legs and beg you for money to manage.
To be fair, Dan Loeb's Third Point and Paul Singer's Elliot Associates are both well-known elite hedge funds with stellar long-term track records. But the influence they have in politics is quite pervasive and their actions contravene all good governance rules. They're basically buying themselves allocations and they know it.

And despite his great track record, Loeb is widely despised on the Street as being an arrogant SOB who doesn't honor the terms of the contracts he has with senior analysts and portfolio managers. He's basically another uber wealthy hedge fund prick with his head up his ass. They're a dime a dozen on Wall Street.

The article above doesn't capture the real problem at U.S. public pension plans, namely, lack of proper governance. You basically have politicians appointing political bureaucrats in charge of public pensions, paying them peanut salaries and getting monkey results. There are exceptions but this is typically how U.S. public pension funds are mismanaged.

And who benefits most from this? Of course, the Paul Singers, Dan Loebs, Steve Schwarzmans, and all the rest of the who's who managing hedge funds and private equity funds. It's one big alternatives party -- for the big boys. Everyone is making a killing except for these public pension funds, praying for an alternatives miracle that will never happen. These alternatives managers and their sophisticated marketing are milking the public pension cow dry. They basically have a license to steal.

And why not? There are plenty of dumb institutions listening to their useless investment consultants who are more than happy to recommend the latest hot hedge fund or private equity fund to their ignorant clients. It's a frigging joke which is why the Oracle of Omaha is 100% right when he warns us that the worst is yet to come for U.S. public pensions. When the shit really hits the fan, it's going to be a bloodbath!

As far as New Jersey, Gov. Christie has done some good things on pension reform but a lot more needs to be done. Double-dipping pensioners are bleeding New Jersey dry.  Unions can bitch all they want about rich alternatives managers meddling in their state's politics but they must accept shared risk of their plan, which includes raising the retirement age and cuts in benefits as long as the plan is chronically unnderfunded. The state of New Jersey, however, should make sure it tops up its public pension plan which it neglected to do for years (the major cause of the pension deficit).

Below, Chicago Mayor Rahm Emanuel, shares his thoughts on the passing of the Affordable Care Act. Emanuel also talked up his policies on healthcare and education but astutely avoided answering any tough questions on Chicago's disastrous pension plans. I pity the fools who ignore the plight of their underfunded public pension funds. I predict more pain ahead and by the time U.S. pension funds throw in the towel on alts, it will be too late.

Wednesday, March 26, 2014

Raging Fire at Tampa's Hot Pension Fund?

In my last comment, I wrote about the pension fund that broke all rules, praising the Tampa firefighters and police officers pension fund for their stellar outperformance using one investment manager. Turns out, they may indeed be breaking a lot more rules than I first thought.

Chris Tobe, author of Kentucky Fried Pensions and now senior consultant at the Hackett Group, alerted me to two articles written by Ted Siedle, raising some disturbing red flags on the Tampa firefighters and police pension fund:
I have two words of advice for firefighters and cops who participate in the City of Tampa Firefighters and Police Pension: Watch Out. While I cannot say for certain that your pension’s assets are being mishandled without further investigation, there are ample “red flags” present and I believe an independent forensic review should be undertaken of the fund.

Based upon the documents that I have reviewed, in my opinion, it is impossible for participants in the fund to assess the integrity of the plan’s investments or the plan’s ability to pay benefits. The financial statements of the municipal pension available on its website say as much:

“Management has elected to omit substantially all of the disclsoures required by accounting principles generally accepted in the United States of America. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the Tampa Firefighters & Police Officers Pension Fund’s statements of net assets available for benefits, and the related statements of changes in net assets available for benefits. Accordingly the financial statements are not designed for those who are not informed about such matters (emphasis added).”

If the financial statements are not designed to provide assurances to pensioners regarding the fund’s ability to pay benefits, then what are the financial statements designed to do?

If you’re a participant in the fund, a taxpayer contributing to the fund, or an investor in City of Tampa municipal bonds for that matter, in my opinion, you need to know how the $1.6 billion pension is being managed. Your money is at risk.

If you’re looking for audited financials for the fund, you’re out of luck. In the financial statements the accountants state, “We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.”

The accountant for the Tampa pension is the local firm of Nobles, Decker, Lenker & Cardoso. Why would a $1.6 billion municipal pension contract with a local accounting firm to provide a mere “compilation” and financial statements that are “not designed” to inform participants, as opposed to using a nationally recognized firm to do a true audit consistent with generally accepted accounting principles– audited financials that would be comprehensible to all? (According to guidelines applicable to CPAs, “compilations” are often prepared for privately-held entities that do not need a higher level of assurance expressed by the accountant. That hardly describes a $1.6 billion public pension.) I don’t know the answer to even that question but it gets worse.

In the 30 years I have been involved with public funds, I have never seen financial statements of a public fund wherein the accountants admit, “We are not independent with respect to Tampa Firefighters & Police Officers Pension Fund.” If the accounting firm is not independent, i.e., it is conflicted for some reason and is not actually auditing the fund, then what is the value, or indeed purpose, of the financial statements it has prepared? I believe stakeholders in the pension deserve an explanation as to why the accountants to the fund are not considered independent so they may assess whether that lack of independence is fatal. Further, why, out of all the accounting firms in the world, did the pension choose an accountant that was not independent?

There are more red flags here. 100% of the assets of the $1.6 billion pension are now and have for the past 39 years been managed by a single investment advisor, Bowen, Hanes & Company, based in Atlanta, Georgia. According to the firm’s SEC registration, Bowen, Hanes & Company manages a total of approximately $2 billion. That is, a single client, the Tampa pension, represents approximately 80% of the money management firm’s assets under advisory. So much for diversification of manager risk.

In my decades of professional experience, I have never seen a public pension fund with investment guidelines that would permit it to invest more than a limited amount of its assets, say 10%, with a single money manager. Further, the investment guidelines of public funds generally limit the percentage of a manager’s assets the fund’s assets may represent. Both of these investment restrictions are prudent.

In my experience, if a money manager has impressive investment performance, he will be able to attract additional clients—especially when a large public pension invests with him. It is a red flag, in my opinion, when a manager seemingly fails to attract additional clients over decades and remains dependent upon a single public pension.

So how have the Tampa pension’s investments performed over time? No one can know the answer to that question for two reasons. First, as mentioned earlier, there are no audited financials of the fund to rely upon. Second, the limited performance summary and investment history provided by Bowen, Hanes & Company on the fund’s website, in my opinion, raises at least as many questions as it answers. A forensic review is required to determine with certainty just how the fund’s investments have fared.

Tampa firefighters and police officers deserve better than abundant red flags and a paucity of reliable financial information related to their retirement savings plan.
Siedle followed up that article with another, New Red Flags Related to Tampa Firefighters and Police Pension "Audited" Financials:
$1.6 billion Tampa Firefighters and Police Pension expects to dramatically out-perform legendary investor Warren Buffett’s Berkshire Hathaway pension plan.

Last week I wrote about the many red flags I had spotted relating to the $1.6 billion Tampa Firefighters and Police Pension and the need for a forensic investigation. Among other issues I identified concerning the management and performance of the fund, I indicated that the pension displayed on its website financial statements that were unaudited– mere “compilations” prepared by a local accounting firm that was not independent of the fund.

Someone at the Tampa Firefighters and Police Pension must have read my Forbes posting because miraculously this week audited, as well as so-called audited, financial statements appeared on the website. Now visitors to the website can choose between viewing “financial statements” that are unaudited, or what the fund believes are “audited financial statements.”

Why a public pension would present to the public on its website unaudited financials omitting “substantially all of the disclosures required by accounting principles generally accepted in the United States of America”—financial statements that are “not designed to inform” pension participants about such matters when audited financials existed, is hard enough to understand and should, in my opinion, be investigated. However, the audited and so-called audited financial statements presented on the website raise far more troubling questions about the management of the billion-plus public pension.

Take a look at the September 30, 2004 so-called audited financial statements posted on the fund’s website. Look like audited financials to you? They’re not. In the upper-left corner is typed DRAFT 5/14/2004. You’ll find no auditor named in, or signing, the draft. Looks to me like the pension either didn’t get audited that year, or misplaced the audit. Either way, be concerned. It’s scary when a billion-plus pension is so sloppy.

(Author’s addendum: When this article was written on Friday, January 25th, the 2004 so-called audited financials, to which there was a link, were an unsigned draft by an unknown person or firm. Monday, January 28th, the unsigned draft was replaced with a different document. Better late than never.)

In the past ten years, the Tampa Firefighters and Police Pension has changed auditors from Ernst & Young in 2001-2002, to no-named auditor of a draft in 2002-2003, to KPMG for a few years, then back to Ernst & Young for a spell and, most recently, to the firm of Moore Stephens Lovelace, P.A. What does that tell you?

When companies change auditors frequently, or without explanation, it is considered a major red flag by investors and regulators alike. I’ve never seen a pension whip through auditors as quickly as this one. This public pension fund is exceptional both in having zero turnover of investment advisors, using a single money manager to oversee 100% of its assets for the past 40 years, and in changing auditors every couple of years.

Auditor changes have been a growing concern as regulators scrutinize the reasons behind such changes and what they might portend about a company’s financial well-being. A change in auditors can result from either a dismissal by the client, or the auditor’s resignation. Auditor resignations often occur when a company is in real financial trouble, and the resignation can be accompanied by a significant drop in the price of the company’s stock. For such reasons, the SEC must be notified when a public company changes auditors.

Investors and regulators view auditor resignations and dismissals differently. Resignations are more common when litigation is in the wind and dismissals more frequently result from disagreements about issues such as internal control weaknesses and the reliability of financial reporting.

I don’t know the reasons behind the Tampa Firefighters and Police Pension frequent change in auditors, e.g. whether the changes result from resignations, or dismissals. I do note that the most recent auditors do not express an opinion on the effectiveness of the fund’s internal control over financial reporting.

But there are more red flags here.

The 10% assumed rate of return on investments disclosed in the pension’s financials is absurdly high. It’s bad enough that most public pensions today assume an unrealistic rate of return around 7.5%– in excess of the rate deemed achievable by legendary investor Warren Buffett . Berkshire Hathaway’s pension projects a paltry 7.1% overall return.

According to the performance summary and investment history of the pension, the longstanding investment manager’s stock picks have nearly tripled the S&P 500. Why other public pensions haven’t retained this Buffett of Atlanta to manage 100% of their assets remains a mystery.

As I said before, if you’re a participant in the fund, a taxpayer contributing to the fund, or an investor in City of Tampa municipal bonds for that matter, in my opinion, you need to know how the $1.6 billion pension is being managed. Your money is at risk.
I am glad Chris Tobe brought these articles to my attention. Ted Siedle, the Pension Proctologist, raises many disturbing red flags. As I stated in my last comment, "I don't know much about Bowen, Hanes, based in Atlanta, but they're doing an outstanding job managing the pension assets of this Tampa pension fund." Boy, was I way off! (and so was the New York Times!)

Let me blunt, I question any investment manager whose assets basically comprise the entire assets of a single public pension fund from Tampa. If Mr. Bowen is that great, how come I and many others I asked have never heard of the "Buffett from Atlanta"? Is there collusion? Are there bribes and kickbacks going on here between Mr. Bowen and Mr. Griner? Sure looks shady.

Below, a report from last summer on how the Tampa police department's DUI squad is under fire. I think the FBI should get involved and start digging deeper into the red flags raised above and investigate any possible fraud or crime involving the Tampa firefighters and police officers pension fund. There is definitely something shady going on there and it really stinks.

Tuesday, March 25, 2014

The Pension Fund That Broke All Rules?

James Stewart of the New York Times reports, A Pension Fund Invests Against the Rules, and Wins:
Are the trustees of the Tampa firefighters and police officers pension fund out of their minds?

“Quite a few people tell me we’re crazy,” Richard Griner, a 41-year-old Tampa police detective and vice chairman of the pension fund’s board, told me this week. “I go to quite a few investment conferences. They just can’t believe that we do this the way we do. But then I tell them the numbers, and they tend to shut up.”

The Tampa, Fla., pension fund may be unique in its approach to managing its assets, which totaled $1.76 billion as of last September. Unlike the so-called Yale model, which has been widely copied and stresses alternative investments, the Tampa fund has no hedge fund or private equity investments.

But neither does it follow the low-cost, index-oriented approach championed by Vanguard and others. The Tampa fund doesn’t own index or mutual funds.

As for being diversified, which is the mantra of nearly all institutional money managers and consultants, it isn’t. A single outside manager makes all investment decisions, and the fund’s assets are concentrated in a relatively small number of stocks and fixed-income investments.

In short, the Tampa pension fund pretty much breaks all the conventional rules of fund management.

But then there are the numbers, as Mr. Griner put it.

Over the last 20 years, the Tampa fund has generated an average annualized return of 9.88 percent as of last Sept. 30, which puts it in the top 1 percent of public pension plans with assets of more than $1 billion, according to the Wilshire Trust Universe Comparison Service from the investment advisory firm Wilshire Associates. The fund’s 10-year annualized return (9.72 percent) and 25-year return (10.48 percent) also rank in the top percentile.

By comparison, a conventional 60/40 mix of investments — 60 percent in a Standard & Poor’s 500-stock index fund and 40 percent in a bond index fund — generated a 20-year average annualized return of 7.9 percent, and the S.&P. 500 generated 8.8 percent. Calpers, the giant California pension fund whose highly diversified approach has been widely copied among pension funds, generated 7.7 percent over the same period.

Yale University remains the champion, with a 13.5 percent average return over a 20-year period. But over longer periods, the Tampa fund is coming close. Since Bowen, Hanes & Company started managing the fund in 1974, it has generated an average annualized return of 12.2 percent, and its assets have grown to over $1.75 billion from $12.1 million.

Thanks to the fund’s performance, Tampa’s retired police and firefighters enjoy retirement benefits that are the envy of many state and local governments. After 30 years of service, retirees are paid a pension that amounts to 94.5 percent of their average compensation for the highest three years of their last 10 years on the job. On average, that amounts to just over $40,000 a year for nondisabled retirees. The fund has 3,326 beneficiaries.

The man responsible for these numbers since the late 1990s is Harold J. Bowen III, known as Jay, president of Bowen, Hanes, based in Atlanta. Bowen, Hanes has been managing the fund for 40 years, which may be a record for longevity. I was curious to meet Mr. Bowen when he was in New York recently, since consistently beating the S.&P. 500 over 10 or 20 years, let alone 40, is all but unheard-of.

Mr. Bowen, 52, is tall and thin — he will be competing in the Escape from Alcatraz triathlon in San Francisco on June 1 — and his investment approach, based on his description, could be considered boring. An English major at the University of North Carolina, he got interested in economics and attended the London School of Economics before joining his father’s firm in 1986. His father, Harold J. Bowen Jr., forged the tie to the Tampa fund and generated its high returns before handing his investment philosophy and clients to his son.

“We take a very plain-vanilla approach,” Mr. Bowen said. “No private equity, no hedge funds, no speculative bonds.”

The fund maintains a conservative asset allocation of 65 percent equities and 35 percent fixed income. Before 1980, the fund owned no foreign securities; today, those securities can go to 25 percent. But it has no emerging market equities. “We’re risk-averse and very quality oriented,” Mr. Bowen said. “We don’t want to speculate. We’re not trying to hit the ball out of the park.”

His firm charges low fees: For the Tampa fund, it’s a flat 25 basis points of assets under management, or $4.4 million last year based on the fund’s value as of Sept. 30. By comparison, Calpers spent $33 million in 2012 just on consultants, which doesn’t include any management or performance fees

But Mr. Bowen’s approach isn’t passive. The key to the fund’s strong performance has been old-fashioned stock picking, and a relatively concentrated portfolio of 70 to 80 stocks. “We’re looking for the blue chip companies of the future,” Mr. Bowen said, which tend to be companies with market capitalizations of $500 million to several billion.

He also takes a value approach, looking for companies that are out of favor and seem undervalued by the market. Then, the fund holds its positions over long periods. Mr. Bowen oversees five investment professionals, and they take a “thematic, top-down approach,” identifying macroeconomic trends and stocks that will benefit.

Currently, the fund has a focus on global, consumer-oriented companies like Unilever and Nestlé. Over the last decade or so, the firm was astute at identifying the commodities boom and moved into Canadian resource companies like the nickel producer Inco (which generated a big gain when it was taken over by the Brazilian mining giant Vale). After the financial crisis, the fund shifted away from natural resources, although it still holds some positions.

Mr. Bowen expresses some surprise that his concentrated, buy-and-hold, value-oriented approach is considered so unorthodox among pension fund managers. “It’s pretty much what Warren Buffett does,” he said. “He’s not diversified, either. But practically no one else follows his model. We’re like salmon swimming upstream. The consultants have been trying to wedge their way in here, but after 40 years, the trustees back me.”

Mr. Griner, the pension board vice chairman, said: “Every time I go to a conference, there’s a sales pitch that, the more you diversify the safer you are. But my train of thought is: I’ve got a 40-year return rate here that blows any methodology out of the water. No one else, not the big money managers, not the big endowments, have the same returns with such low fees. We’ve got a history of 20-year rolling returns that’s higher than what the S.&P. is putting out. That’s as solid as you can get. As long as Jay keeps producing those kinds of returns, I can’t fathom changing anything.”

Both Mr. Bowen and Mr. Griner acknowledge that the fund doesn’t always outperform broader averages. Last year, the fund’s return of 15.11 percent qualified for the 14th percentile in the Wilshire Universe, and trailed the S.&P.’s 19.3 percent return over the same period. (The fund’s stocks, however, did outperform the S.&P. 500.) “We have the luxury of taking a long-term approach, Mr. Bowen said. “If we outperformed the S.&P. 500 every year, we’d be doing something wrong.”

Mr. Griner said that a patient, long-term approach is instilled in new trustees by others on the board. (He’s one of nine trustees, which include three each from the fire and police departments and three appointed by the mayor.) “Our fund exists in perpetuity,” he said. “So a three- or one-year outlook, it has some influence, but it’s not going to dictate our outlook. We want growth over 50, 60 years. We want Jay to look long term and give us stable long-term results.”

Michael Schlachter, a managing director at Wilshire Associates, is one of the skeptics about the fund’s approach and its ability to keep generating such high returns. He said that handing all of a pension fund’s assets to a single manager like Mr. Bowen “is extremely unusual and it poses a fair amount of risk. To assume that one firm is the best in every asset category, especially a small firm that no one around here has ever heard of, is extremely risky. What if a bus hits the senior person?”

Mr. Griner said he understood why others were skeptical. “The only real down side to having a single manager is if you have a bad one,” he said. “You think of all the managers. How many can outperform the S.&P. over any period of time? It’s very hard to find anyone with any consistency over a decade who can outperform the S.&P. It’s unheard-of. We happened to have gotten a good one, and he’s done a phenomenal job. But I don’t fault others. It would be scary to entrust everything with one person and hope you’ve gotten the right person.” He added, “I hope it never happens, but if Jay leaves, a low-fee index option might be the way to go.”

Mr. Griner and his fellow trustees serve on the board without pay, but he credits the experience with changing his life. “I’d dabbled in the stock market,” he said, but since joining the board, “I’ve been to seminars. I’ve taken classes at Wharton. This summer I’m going to Harvard.” He’s taking classes at the University of South Florida and is studying to become a certified financial planner.

“We let Jay make the decisions, but I like to know how, why and when,” Mr. Griner said. “I yearn for that knowledge.”
How 'bout them apples, eh? One single low cost value oriented manager and the long-term return of the Tampa firefighters and police officers pension fund is among the top 1% of plans managing over $1 billion and even closing in on powerhouse Yale Endowment fund. That's extremely impressive.

I don't know much about Bowen, Hanes, based in Atlanta, but they're doing an outstanding job managing the pension assets of this Tampa pension fund. Their long-term, value-oriented approach of selecting a concentrated portfolio of stocks is akin to what Warren Buffett does at Berkshire and it's worked wonders for him and his shareholders.

But is this a wise approach for a pension fund to adopt? It contravenes all investment wisdom, including the "prudent person rule" for pension funds, but if it's working for them, why not?

Keep in mind, however, the Tampa firefighters and police officers pension fund is relatively small, managing close to $1.8 billion. If they were managing over $100 billion, I guarantee you they'd be relying on useless investment consultants shoving them into hedge funds, private equity and they'd be praying for an alternatives miracle like the rest of the U.S. public pension fund crowd who are literally getting robbed blind feeding the Wall Street beast.

I wrote about this last week when I went over the hedge fund curse. Again, why the hell are you going to pay Ray Dalio or any hedge fund hot shot managing billions in assets a 2% management fee? These mega hedge funds have become large asset gatherers delivering beta, or in many cases, sub-beta performance and their managers get featured in Institutional Investor's Alpha magazine on "The Rich List."

These hedge fund hot shots aren't true entrepreneurs like Ray Kroc, Sam Walton, Bill Gates, Steve Jobs or the Koch brothers. They're just lucky investment managers who have become rich beyond their dreams because of dumb institutional clients paying them alpha fees for (sub) beta performance!

It's a joke. I was talking about it with a buddy of mine this afternoon. At least George Soros, the undisputed king of hedge funds, manages his own money. He doesn't need or want CPPIB, the Caisse or Ontario Teachers' as clients and he's happy making multi-billions managing his own money. He's living the real dream, the dream of freedom and not having to answer to some schmuck pension fund analyst like myself in my previous career.

But guys like Soros, Buffett and even this Mr. Bowen who I never heard of are an anomaly in a sea of mediocrity in the investment world. Good luck finding them and even if you do, there are no guarantees that even the best of the best won't suffer a huge drawdown. I have seen the rise and fall of plenty of hedge fund titans. When they're on top of the world, they're cocky, arrogant SOBs, reminding you how lucky you are to be invested with them. But when they fall hard, they put their tails between their legs and beg you for money to manage.

What I like about Mr. Bowen is he charges the Tampa fund a flat fee of 25 basis points, not 2 and 20 these fucking hedge funds charge for shitty performance. It's plain vanilla, pure bread and butter, but they're doing it extremely well and not gouging their clients with excessive fees. And the beneficiaries of this plan are enjoying the spoils of this outperformance.

Again, it's working just fine for them, but for larger plans, I say you stick to the HOOPP or Ontario Teachers approach of managing assets and liabilities at a relatively low cost. They would never put all of their assets with just one manager, even if it was Warren Buffett himself.

Below, Bloomberg's Scarlet Fu reports on how Boeing is freezing pensions and shifting their employees to 401 (k) plans. America's 401 (k) nightmare isn't over. We're just living a temporary reprieve. Now more than ever, pension leaders and policymakers need to go over HOOPP's conference on DB pensions to understand why we need to bolster defined-benefit plans for all our citizens.

Postscript: I was wondering why nobody else heard of the "Buffett of Atlanta." Turns out Tampa's hot pension fund might be a smoldering fraud. I think the FBI needs to investigate their dealings with Bowen Hanes a lot more closely.

Monday, March 24, 2014

Wynne Harpoons Harper on Pension Reforms?

The Canadian Press reports, Kathleen Wynne takes aim at Harper over pension reform:
Ontario Premier Kathleen Wynne is putting Prime Minister Stephen Harper in her crosshairs as she girds for a possible spring election.

Addressing the party faithful in Toronto, she says his opposition to pension reform is somewhere between "offensive and inexplicable."

Wynne clashed with Ottawa last year over its refusal to boost the Canada Pension Plan, and has said she will introduce plans for a new, separate pension plan for Ontarians this year.

"It is somewhere between offensive and inexplicable to ask the people who worked hard all their lives to be rewarded with retirement that takes them out of the middle class," Wynne told the crowd. "That might be Stephen Harper’s way, but it is not our way. It is not the Liberal way.”

But Wynne also took a page from Harper's election playbook, painting her provincial Liberals as the safe, steady alternative to the reckless Tories and New Democrats.

The Progressive Conservatives want “a war on labour,” Wynne said, while the NDP “believes that business is the enemy.”

“Neither has a plan to move forward. Neither shares our laser focus on helping working families.”

Well-funded public transit, keeping Ontario's hospitals public and protecting the Great Lakes could make it into the Liberals' next election platform.

Party officials say one of those policy ideas — which were selected from suggestions from thousands of party and non-party members — will be in the document.

It's likely public transit will factor prominently, as Wynne has been talking for months about dedicated funding for a major transit expansion in the Greater Toronto and Hamilton area.

And an election could be around the corner if the minority Liberals fail to pass their spring budget, whose date hasn't been announced yet.

Delegates at the party's annual general meeting in Toronto are already getting ready with training sessions designed to prepare them for the next campaign.

"What Leadership Is" is the other slogan the party is using to brand Wynne, who was sworn in as premier just over a year ago, but has plenty of experience having spent years at the cabinet table.

But the opposition parties say those so-called Liberal "safe hands" cancelled two unpopular gas plants at a cost of up to $1 billion and are driving up energy rates.

There are also two criminal investigations underway, including one into the suspicious business activities of Ornge, the province's air ambulance service.

The Liberals are driving out businesses with high taxes and energy rates and catering to unions at the taxpayers' expense, the Tories said.
In my humble opinion, Kathleen Wynne is Canada's best politician. She gets it and it's too bad she and her Minister of Finance didn't show up to the HOOPP conference on DB pensions last week because I would have told them to continue sticking it to the feds.

Luckily for all Canadians, the Harper Conservatives are on their way out. Their days are numbered and they know it, which is another reason why I wasn't surprised our federal finance minister resigned last week. I personally believe Jim Flaherty was an outstanding finance minister but he had enough of Harper and he knows dark days are ahead for the Canadian economy (keep shorting the loonie!!).

Interestingly, I was reading an article in the Montreal Gazette over the weekend on how the Caisse's Ivanhoe Cambridge and Ontario Teachers' Cadillac Fairview Corp. will spend $3 billion to revamp Montreal's downtown core. God knows our city needs it but I'm not sure the jobs will be there to finance all these renovations. The Caisse and PSP should talk to their brokers to set up offices here and hire more finance and economics students who are forced to leave this province.

Taking the train into Toronto, I met a nice young lady whose husband is a chef. He works in Montreal, she works in Toronto and commutes every weekend. We were talking about how dumb Torontonians are for electing Mayor Ford (Duh!), how the PQ has to go (my fingers and toes are crossed!), how relatively poor Quebec is compared to Ontario and how expensive housing is in Toronto. Pulling into Union Station in Toronto, you can see and feel the money. It' a mini Manhattan.

Of course, I would never live in Toronto. I hate commuting, detest the Maple Leafs and Toronto lacks Montreal's charm and French influence which is why I love our city. Also, there are no good bloody restaurants in Toronto. Brokers on Bay Street love going to Earls but it's a meat market full of hopelessly horny brokers gawking at ladies.

Luckily this young lady I met on the train recommended I dine at Canoe, which isn't cheap but it's excellent. Heather Cooke of Unigestion recommended I try BUCA and Beast next time I'm in TO.  I wish somebody could explain to me why Toronto still lacks a great Greek restaurant like Milos or awesome steakhouse like the Rib 'N Reef. And Toronto has nothing that remotely compares to Marven's in the Danforth area. Dining out in TO is truly pathetic.

As far as transportation, I can't wait till they finish the construction around Union Station. I typically take the train into Toronto and walk across the street to the Fairmount Royal York, my favorite hotel in Toronto (although I hear the Shangri-La is very nice too). The construction in that area is wreaking havoc on traffic and really pissed me off (they were suppose to be done a year ago!).

Something else that pissed me off? The entrance across Union Station at the Royal York isn't accessible to people with mobility issues or elderly people. You have lug your luggage up these stairs and the railing in the middle is covered with stupid flowers (get rid of them!). I explained this to the hotel's managers and they were kind enough to reply and send my complaint to the owners (can't have a luxury hotel in downtown Toronto with no escalator at the entrance, it's ridiculous).

What else pissed me off about my trip to Toronto? Well, the press coverage on the HOOPP conference on DB pensions was virtually non-existent (what else is new?) and every time I take the train to TO I keep asking myself how come this rich country of ours still hasn't built high speed trains linking Quebec City to Windsor Ontario?!? It's 2014 and Canada has an antiquated train system, what a frigging joke!

Below, Ontario Premier Kathleen Wynne shores up the troops. I can only hope the Liberals win a majority government here in Quebec so we can get on to discussing important issues like jobs, healthcare and pensions.

By the way, in case you missed it, Canadian doctor Danielle Martin schooled U.S. Senators a couple of weeks ago on the benefits of our healthcare system. She spoke at the American Congressional hearing about single-payer health care. I don't believe in a two-tier healthcare system and I don't believe in a two-tier pension system either.

I'd like to speak to these Senators on the U.S. public pension problem but we all know I have a better chance of winning the Lotto Max. Americans don't like to be schooled on anything, especially healthcare or pensions. Maybe they should listen to the Oracle of Omaha.

Thursday, March 20, 2014

The Hedge Fund Curse?

Matt Phillips of Quartz reports, Hedge funds bet big on GM and now the stock is getting creamed:
Not long ago, hedge fund managers were deeply in love with General Motors.

Goldman Sachs equity analysts said the stock appeared the most frequently among the largest 10 holdings of hedge funds it examined, making it a more important position than Google or Apple. At the end of 2013, nearly 200 hedge funds owned GM, more than any other stock held by the nearly 800 hedge funds Goldman analysts looked at.

And then this happened (click on image).

The underperformance of GM shares isn’t a big mystery. An unsettling recall that the automaker issued in February is largely to blame. But it’s a useful reminder that even financial titans don’t call everything right.

Now, we should point out that the stock is still up about 25% over the last 12 months, slightly better than the 21% gain the S&P produced. So how funds fared on their GM bets depends a lot on when they got into the stock. For instance, David Einhorn’s Greenlight Capital built the bulk of his position back in late 2011, when the shares were much lower. As of Dec. 31, Greenlight held a roughly $600-million position in GM. Meanwhile, Kyle Bass’s Hayman Capital didn’t even have a position in GM until the fourth quarter of 2013, when the fund bought roughly 4.6 million shares of GM, a position valued at $162 million, according to FactSet data. The price of the stock is down sharply since then.

In other words, even the big boys lose a few now and then.
The "big boys" most certainly lose money. Even Soros, the undisputed king of hedge fund managers, has made some terrible calls, like buying J.C. Penney in Q3 2013 and boosting his stake in GM in Q4 2013. Of course, Soros is a global macro guru, so he doesn't really care about a few losing positions in stocks. He made a cool $1 billion shorting the yen in 2013 and probably made more shorting the Canadian dollar recently (if he was smart and took my advice to short Canada).

As far as GM, I have no stake and don't plan on initiating one. The only thing I know about the car market is that crossborder business from Canada to the U.S. is booming. My buddy, Johnny, is the undisputed king of car auctions in Quebec and maybe Canada. He has secondary progressive MS, has difficulty walking, but still wakes up at 5 a.m. every morning and works a full 14 to 16 hours a day, six days a week. And they say disabled people don't work, what a bunch of ignorant nonsense! (as a side note, I called him this morning to tell him about a new study on how statins may help patients with progressive MS. I also told him to get his ass in the gym and come train with me and Big Lloyd).

Johnny's business is booming these days and he can hardly keep up with demand. I warned him last November the Canadian dollar was going to fall and to get ready to ramp up operations, buying all the used cars on the market which he resells down south for a nice profit. Interestingly, he lives on Gordon Fyfe's street but unlike Gordon and most of the pension plutocrats reading this blog, he earned his millions the old fashion way, through blood, sweat and tears. I know, I spent a day with him in Quebec city buying GM trucks at an auction and saw the entire operation firsthand and was completely blown away and wiped by the end of the day (I don't know how he does it!!).

Back to the topic at hand. I was in Toronto earlier this week for a HOOPP conference on DB pensions. I hooked up with Ron Mock, president and CEO of Ontario Teachers' Pension Plan, prior to the conference for a quick chat. I reminded Ron that I was among the first to invest in Bridgewater back in 2002 when I was working at the Caisse (h/t to Simon and Alan of McGill Capital) and then told him to take a look at them. Bridgewater was managing roughly $10 billion back then but it wasn't the juggernaut it has become now.

I told Ron, however, when I wrote my comment a couple of years ago on Texas Teachers losing its Bridgewater mind, I raised several yellow flags and would have likely recommended pulling money out. In fact, one year ago, I revisited Bridgewater and said the world's biggest hedge fund is in trouble, but I didn't sound the alarm because I know Ray Dalio, Bob Prince and their process is still one of the best in the world even if they're way too big now.

Still, too many institutions fall in love with their hedge fund managers and they blindly follow bad advice from their useless investment consultants. It's truly pathetic. I told Ron: "I don't care if your name is Ray Dalio, Ken Griffin, Dan Loeb, or Stevie Cohen, I'll grill your ass just as hard as I'd grill any new or less well known manager." In fact, the more arrogant you are with me, the more intense pleasure I get in grilling your ass. That goes for hedge fund, private equity or pension fund managers (ask Mario Therrien and Gordon Fyfe, they were in meetings with me and famous hedge fund gurus. In fact, I got under Dalio's skin, pounding the table on deflation, and he blurted out: "Son, what's your track record?!?" Gordon kept bugging me all day after that meeting).

In Toronto, I also met Heather Cooke who is now the Director of Institutional Sales at Unigestion, a well known Swiss asset manager specializing in hedge funds, private equity and low vol equity strategies.  Heather is extremely sharp and has extensive experience with multi-manager platforms. She worked many years at Northern Trust Global Advisors before moving on to RogersCasey and Mercer. She's also very nice, not your typical institutional salesperson. I love speaking to sales people who actually know what they're talking about (she is research focused; I highly recommend you contact her at to learn more about their low vol strategies and process which focuses on risk management).

Heather told me Unigestion is looking to hire someone in Quebec. I told her I know people and I might even be interested but there's a catch. "Some people love me, most people hate me, but they all read me and desperately want me to stop blogging and exposing the pension fund industry's dirty little secrets. They'd love for you to hire me so I stop blogging but truth is I'm having fun blogging and making money trading." She laughed and said she will keep that under consideration.

I also met up with one of Canada's sharpest hedge fund talent in Toronto. This is a guy who I would seed in a heartbeat and unlike all of Quebec's hedge funds, which I foolishly keep promoting, he would have no problem obtaining money from Julian Robertson if the Tiger fund was a true seed fund, not an accelerator fund. HR Strategies is currently looking at him for their SARA Fund but I put him in touch with a few U.S. funds of funds and raised concerns with HR Strategies and their SARA Fund (will they survive in the next three years??).

Anyways, we talked about markets and the entire culture of hedge funds. He told me flat out that he's happy to benefit from the 2 & 20 model (it's more like 1.5 and 15 now) but he thinks it's nuts to pay an established hedge fund manager managing billions a 2% management fee. I agreed and even wrote about how some smart managers are now chopping their fees in half. As I told him: "Why should Ray Dalio or any mega hedge fund 'guru' collect billions in management fees for turning on the lights? It's absolutely nuts!!" (if the ILPA had any balls and clout, they would pressure their established managers to only get paid on performance! I talked about this ten years ago at an ILPA meeting in Chicago but people looked at me like I was from Mars)

We also talked about culture at hedge funds. I told him I liked to meet with senior managers and then randomly meet with a junior analyst when doing due diligence. If the senior managers asked me why, I'd tell them flat out "because they carry the weight of your hedge fund" so I want to gauge their level of engagement and happiness and see how well they are treated.  (He told me Dan Loeb has a terrible reputation for not paying his senior analysts and managers the terms of their contract, something which if true, would make me pull out of his fund pronto, no matter how good he is)

In terms of compensation, he told me analysts and managers at hedge funds should be paid "a direct share of the total P&L with their swing factor determined by 1) quality and quantity of their research and 2) making other analysts better at their jobs." Right on!

We also talked about markets and his strategy. He told me his strategy "doesn't fit with funds of funds that look for guys hitting home runs every year because they charge an extra layer of fees" but he's confident in his research, process and ability to mitigate downside risk. In fact, he told me the put-call parity arbitrage presents interesting opportunities right now and shared this with me:
In the great wide world of theory,

Put + Stock = Call + RFD
where RFD = Risk free debt equal to face value of stock.

This assumes vol = vol and all units of vol are priced similarly. In the real world that never happens. Down vol is almost always more dear to buy than up vol sometimes it is not, but mostly it is.

As such this theory is routinely incorrect which should provide arbitrage opportunities.

Check the bid ask spreads on options and the borrow rate on most stocks. Sell put at the bid, short stock, buy a call at the ask, and invest your short proceeds at the RF rate (zero).

The bid ask spreads and borrow rates are what kill it.

If they don't, and you try to move any size, whatever bank you are trading with will collapse it and tell you they couldn't get it done. Seen it happen lots of times.

What I do is different. Picture it as buying insurance.

When the market is go go go go go, upside vol actually gets priced a little higher than downside vol. In that market you buy an at the money or near money put and sell an out of the money put (choose whatever spread you want).
If you are moving small to medium size you split that two part trade across two brokers. If you are moving big, you need a bank to take all the risk in one whack.

When the market collapses, downside vol is much more dear than upside vol. In that market you short the index and buy an out of the money call.

Very similar payoffs, very different cost structures. WIDELY divergent delta exposures when you flip one out for the other and it depends highly on how wide the spread between rungs on your put ladder are.
Very sharp guy who really knows his stuff. He told me his net exposure is zero and his biggest personal holdings are one year put LEAPs, betting the market will get clobbered in 2014.

I told him that I think his timing is off. As I explained in my outlook 2014, the liquidity party will continue but you have to choose your stocks and sectors right. I reminded him of Keynes' famous quote: "Markets can stay irrational longer than you can stay solvent."

But once this liquidity party ends, watch out, global deflation will set in, which is why Soros is asking Japan's leaders to put the pressure on their giant pension fund to crank up the risk.  Soros isn't stupid, he sees the writing on the wall, and it ain't pretty for the financial elite.

By the way, did you notice how many times Fed Chairman Yellen kept referring to the "2% inflation target" during the press conference yesterday? All these dummies are getting their panties tied in knots, fearing Fed tapering, but the reality is if inflation expectations don't pick up considerably, I wouldn't be surprised if Yellen et al. reverse course in six months. Stay tuned. Those who warn you about inflation are on the wrong side of the trade.

Below, the Atlantic Group's John Ricco and Training the Street President Scott Rostan discuss how private-equity firms and hedge funds are offering bigger salaries and more incentives to lure young bankers. They speak with Pimm Fox on Bloomberg Television's "Taking Stock."

"A great time to get into the industry?" I beg to differ. Good luck starting a hedge fund in this environment and make sure you don't work for some arrogant hedge fund manager with his head up his ass (and most of them have their head up their ass!). This clip proves to me there are way too many overpaid, over-privileged analysts working on Wall Street, profiting off dumb pension money.