Public Pension Funds Rethink Hedge Fund Investing
It’s become a familiar scene across the country: Public pension funds gambled billions of dollars of their employees’ retirement money in the high stakes world of hedge funds. Now, as pension fund managers discover that their hedge funds investments have delivered far less than what they expected, many people are left to wonder if their golden years will instead be spent logging more time in the workforce.
Long before Bernard Madoff made front page news for his $50 billion hedge fund Ponzi fraud, hedge funds were garnering the attention of state and federal regulators for their lack of transparency and opaque oversight standards.
Despite this veil of secrecy, public pension funds nonetheless gravitated to hedge funds in droves, putting their money into everything from real estate to private equity funds. In 2005, 13% of all public pension funds invested in hedge funds, according to an April 15 article in the New York Times. Three years later, the percentage had climbed to 40%.
The apparent infatuation of public pensions and hedge funds may be changing, however. Faced with the grim reality of massive losses on their hedge fund investments, more pension funds are scaling back or, at the very least, trying to change the terms of their hedge fund investments.
The California Public Employees’ Retirement System (Calpers) is a prime example. As reported in the New York Times article, the nation’s largest public pension fund is trying to reduce hedge fund fees and alter the terms of its investments to hedge funds. The decision comes after Calpers saw its investments in hedge funds fall from $7.6 billion to $5.9 billion.
Moreover, the annual returns Calpers has achieved since it began investing in hedge funds in 2002 have been modest at best: only a 3.5% annual rate of return. The percentage is far, far less than what it initially had been promised by Caplers’ hedge fund managers, according to the New York Times story.
As for hedge funds, many are in no position to question the demands of investors like Calpers. In the past year, hedge fund assets have collectively fallen by nearly 40% to $1.2 trillion due to record losses and redemption requests. Adding to the industry’s blight are state and federal investigations into whether certain hedge funds made illegal payments to intermediaries in order to gain access to state public pension funds.
Among the hedge firms under investigation by the Securities and Exchange Commission (SEC) and New York Attorney Andrew Cuomo as having paid fees to garner business from the New York State Common Retirement Fund are the Carlyle Group, Odyssey Investment Partners, and HFV Asset Management LP. On April 15, Barrett Wissman, an executive at HFV, pleaded guilty to securities fraud and agreed to a $12 million settlement as part of the investigation.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
