Having Good Investment "Hair" Is Important

Posted on March 31, 2009 by Susan Mangiero

Today was the end of the first calendar quarter and the deadline for mailing the annual $250 business entity tax check to the State of Connecticut. No longer Pension Governance, LLC (we are now organized as Pension Governance, Incorporated), this little act marked our final payment of what I call the "just because we can" tax. But I digress.

As I got to the local post office, minutes from their 5:00 p.m. closing, I asked the nice man behind the counter to postmark it for today, evidencing that I mailed the check on time, like a good business doobie. As he processed my letter, Bob remarked how much he liked my new hair style. Taken aback a bit (because I had not combed my hair before I jumped in the car), I realized that Bob perceived my do as new and hip (some version of the wild gal look). For those who know me, my favorite outfit is yoga pants, a teeshirt and sneakers, with minimal time spent on fancy makeup and coiffs. (Men are so lucky - no heels, no mascara.)

This humorous encounter (Bob is a nice man, always friendly and helpful.) got me to thinking about investment best practices and the extent to which so few organizations publicize their good deeds.

If a plan sponsor or service provider is going to spend time, money and other resources to embark on a robust fiduciary-focused process (regardless of plan design focus), why not flaunt it? No doubt plan participants, shareholders and taxpayers alike want to know that their money is in good hands. On the flip side, how many organizations come to mind that do a poor job but are perceived as being "good guys and gals" (i.e. didn't comb)?

Wouldn't it be great to go beyond numbers and instead have information such as:

  • Who persons the investment committee (experience, education, relationships with vendors)
  • How often they meet
  • How they make decisions on managers, strategies and so on
  • What internal controls are in place to avoid conflicts of interest and potential runaway losses...?

Isn't it time that we separated the good hair from the bad hair?

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Hegemony in Alternatives Land - Are Pensions Getting the Upper Hand?

Posted on March 30, 2009 by Susan Mangiero

According to "Investors warn private equity over cash calls" (March 26, 2009), Reuters reporter Simon Meads writes that private equity firms are facing "intense pressure" from limited partners (pensions, endowments and foundations). Cash strapped themselves, institutional investors are telling asset managers not to come knocking on cash infusion doors any time soon.

Does this phenomenon present a fiduciary conundrum? For one thing, might a limited partner be sued for a contractual breach if they refuse to pony up additional monies? Second, could a dearth of new cash making its way to private equity fund managers end up creating more financial pain for the limited partners? After all, if a private equity and/or venture capital fund finds itself short of the almighty dollar (or other currency), it may be unable to invest in new companies deemed to be high growth and/or be hamstrung from keeping current portfolio companies afloat. On the other hand, limited partners may be reeling from their own pain (whether Madoff induced, stemming from equity losses or something else) and figure that the cost of incremental disbursements outweighs the expense of abstaining.

One thing seems clear.

Institutional investors are demanding more for less. In "Calpers Tells Hedge Funds to Fix Terms -- or Else" (March 28, 2009), Wall Street Journal reporters Jenny Strasburg and Craig Karmin write that this large California giant is "demanding better terms from hedge funds, including lower prices and 'clawbacks' of fees if performance weakens." Said to have been sent to 26 hedge and 9 funds of funds, a March 11, 2009 memo outlines terms, with a proviso that counter terms will be considered.

In a March 6, 2009 article by the same two writers, the deputy chief investment officer for the Utah Retirement System echoes similar sentiments. In his "Summary of Preferred Hedge Fund Terms," Larry Powell calls for lower fees, adding that "management fees should be used to cover operating expenses only, and are not appropriate funding sources for staff bonuses, business reinvestment, strategy expansion, or wealth accumulation by partners." The 4-page letter urges a share structure that transfers "liquidity risk evenly among commingled investors" that could result in how gates, lock-ups and redemption terms apply to short and long-term investors, respectively. Regarding disclosures, Powell describes a minimum laundry list to include items such as:

  • Annual audited financial statements
  • Quarterly information about fees, operational costs, concentration of clients and soft dollar activity
  • Monthly Net Asset Values, return attribution by strategy, geography and/or sector, largest long/short positions, leverage at the fund and strategy level
  • Weekly return attributions and month-to-date estimates of return.

We've heard numerous institutional investors put a stake in the ground for what they perceive to be a more level playing field (their words). Just a few months ago, I led a workshop on risk management and "hard to value" investing red flags to a group of large public plan auditors. Many of the audience members described a "disclose" or "we'll walk" policy now in force with respect to alternative funds. (Hopefully it goes without saying that not every alternative fund is a "hard to value" fund.)

Several things come to mind. Could demands from institutional investors be potent enough, if met, to stave off new regulatory mandates, some of which are outlined in "Does More Financial Regulation Make Us Safer?" (March 29, 2009)? Second, might we see a flurry of alternative fund manager fee-related lawsuits, similar to 401(k) "excessive" allegations that are making their way through the court system?

The match is on - investor versus manager. Who will get the biggest slice of the pie going forward with respect to economic rights?

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Does More Financial Regulation Make Us Safer?

Posted on March 29, 2009 by Susan Mangiero

 

According to its March 26, 2009 press release, the U.S. Department of Treasury advocates what they call "comprehensive reform" to modernize the U.S. financial system and seek to avoid major meltdowns. Key components include:

  • Addressing systematic risk rather than focusing on "potential insolvency of individual institutions" alone
  • "Strengthen enforcement and improve transparency for all investors" as a way to safeguard consumers and investors
  • Create a "substantive system of regulation that meets the needs of the American people," avoid turf wars and "assign clear authority, resources, and accountability" to those in charge of enforcement
  • Outreach to non-U.S. regulators in order to "address prudential supervision, tax havens, and money laundering issues in weakly-regulated jurisdictions."

For those who think this is all bark and no bite, consider that U.S. Treasury Department Secretary Geithner is calling for (a) registration of hedge fund advisers above a certain size, not to mention additional reporting requirement for said alternatives (b) "comprehensive framework of oversight, protection and disclosure for the OTC derivatives markets" (c) more stringent capital requirements for organizations deemed to be major financial market participants and (d) a single independent regulator to oversee "important" entities. Click to read "Treasury Outlines Framework for Regulatory Reform" (March 26, 2009).

Not everyone thinks that more regulation is smart regulation. During a recent interview with First Business, hedge fund consultant Kristin Fox voiced two problems with a regulatory power grab. Enhanced disclosure may lull people into false security, discouraging them from probing further. Additionally, regulators may struggle to understand the economics of "complex" instruments. Click to view "Financial System Overhaul," written by Beejal Patel (March 26, 2009).

Let me ask what may seem like simple questions.

The point is that we've had more than a trivial amount of regulation in place for years yet we've still had problems. How are new mandates going to trump existing rules?

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Retirement Plan Pundits Address Conflicts of Interest

Posted on March 26, 2009 by Susan Mangiero

On March 24, 2009, various experts gave testimony before the U.S. House of Representatives Committee on Education & Labor, Health, Employment, Labor and Pension Subcommittee about potential conflicts of interest in the event that firms are allowed to give "conflicted financial advise" to 401(k) plan participants. Click here to access the testimonial statements of experts that include:

  • Ken Baker, Corporate Director of Human Resources Applied Extrusion Technologies Terra Haute, IN
  • Mercer Bullard, Founder and President Fund Democracy, Nonprofit Advocate for Mutual Fund Shareholders Oxford, MS
  • Sherrie Grabot, CEO GuidedChoice Los Gatos, CA
  • Charles Jeszeck, Assistant Director, Education, Workforce and Income Security Issues U.S. Government Accountability Office Washington, DC
  • Melanie Nussdorf, Partner Steptoe & Johnson LLP, on behalf of SIFMA Washington, DC
  • Andrew L. Oringer, Partner White and Case, LLP. New York, NY
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New GAO Study About Conflicts of Interest and Impact on Retirement Plans

Posted on March 26, 2009 by Susan Mangiero

In his Congressional testimony, U.S. Government Accountability Office ("GAO") executive, Charles A. Jeszeck, describes a "statistical association between inadequate disclosure and lower investment returns." The stated premise is that pension consultants who fail to disclose  their conflicts of interest could cost defined benefit plans in excess of 100 basis points if or until the situation is corrected. Conflicts can take many forms, including, but not limited to, business relationships between pension consultants and broker-dealers that question whether pensions are getting the best execution possible.

Though the research focused on traditional plans, the GAO suggests that "participants could be more vulnerable to potential adverse effects of conflicts of interest in DC plans such as 401(k) plans." The report cites one study that showed that "36 percent of responding sponsors either did not know the fees being charged to participants or mistakenly thought no fees were charged at all." Revenue sharing arrangements remain a mystery for some while others are unaware of "hidden" fees.

As the world awaits final proposals from the U.S. Department of Labor about conflicts of interest and disclosures, one ponders - How much disclosure will truly help save the day in terms of minimizing conflicts of interest that otherwise weaken the bond of trust between a plan sponsor and its service providers as well as the relationship between plan participants and sponsor?

Editor's Note:  See "Testimony Before the Subcommittee on Health, Employment, Labor and Pensions, Education and Labor Committee, House of Representatives: Private Pensions - Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans" by Charles A. Jeszeck, Acting Director, Education, Workforce and Income Security, March 24, 2009.

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Pension Risk Matters Celebrates Its Third Birthday With Continued Readership Growth

Posted on March 23, 2009 by Susan Mangiero

Since I started this blog three years ago to the day, I've been overwhelmed with insightful feedback from readers around the globe. Thank you so much for making www.pensionriskmatters.com more than a labor of love. Your continued support and feedback (even if you disagree with me) is always welcome. The blog has won awards and recognition from all corners of the world. We are proud to count hundreds of thousands of visits.

I look forward to many more productive years in pension blog land. Many thanks readers!

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Honest Work is Good Work

Posted on March 22, 2009 by Susan Mangiero

Photo Source: Oakland Public Library

I put myself through college and graduate school. It was a tough road, strewn with bumps, potholes and lots of worry about what the future would hold. If someone can advance his or her career without the stress and uncertainty of bootstrapping, I say "go for it." Who needs the aggravation? That said, and in the spirit of searching for the silver lining in every situation, I like to think of myself as a survivor of sorts. Where others see failure, I see opportunity. Don't get me wrong. I've had a few pity parties but I try keep them as short as possible. Acknowledging that many of us are graduates of the School of Hard Knocks, where do you go with "woe is me?"

Tonight's blog inspiration (not necessarily tied to pension decision-makers alone) is a CNBC television show entitled "Finding a Job Now: What It Takes In This Economy." During this hour-long program, employment experts and commentators offered helpful tidbits for downsized executives including, but not limited to, saying yes to low-paying work, even if it entails underemployment for awhile.

In "Downsized Executives Forced To Take 'Survival' Jobs," Michael Luo (New York Times, March 1, 2009) provides a case in point, i.e. a former security manager who currently works at a friend's cleaning company. While there is no question that the dichotomy between career desires and reality can be punishing, financially and emotionally, one has to applaud this man's work ethic and sense of integrity. He gets a gold star in my book.

Countless headlines excoriate Wall Streeters for getting bonuses tied to sub-par performance. Yet others go about the business of life, quietly and without fanfare. That such noble folks take responsibility should bring a smile to everyone's face, don't you think?

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Public Pensions: Can Deferrals Keep Coffers Full?

Posted on March 21, 2009 by Susan Mangiero

 

My quotes in "Pension Bills to Surge Nationwide: Many States and Cities Face Hard Choices Because of Market Declines" by Craig Karmin (Wall Street Journal, March 16, 2009) seemed to have resonated with a lot of www.pensionriskmatters.com readers. If you didn't read the article, I said that current funding woes will result in a "huge showdown between taxpayers and public employees" and "The anger is more acute today when people are feeling economic hardship."

In response to queries about New Jersey's plan to use what some might describe as gimmickry to defer pension liabilities, I said that "An IOU is an IOU whether you recognize it now or push the bad news into the future. Taxpayers have the right to know the extent of a town’s pension plan underfunding. A more fundamental question to ask is why there is a need for a deferral in the first place. Why haven’t these plans been better funded to date? Who is accountable and what are their plans to address the retirement plan crisis?

Here is a sampling of the feedback from readers of this blog.

  • In response to "New Jersey Governor Calls for a Deferral of Pension Contributions" (November 29, 2008), one reader wrote: "This is apparently a done deal since towns and counties are making up their budgets assuming as much. Very sad that actuaries have been marginalized (bribed) to keep quiet."
  • In "Forbes Describes Public Pension Benefits as Rich" (February 23, 2009), a reader wrote: "It's helpful, we think, to occasionally put California's state worker issues in a larger context. Take a look at The Arizona Republic's story, "Union's request to halt state layoffs denied."
  • In another response to the Forbes post, dated February 23, 2009, a reader asserts the following: "I think this analysis is a bit overly simplistic. The general characteristics of a governmental workforce can vary greatly compared to the national private sector labor market. Many federal, state and other governments are loaded with a high share of college grads and highly technical workers. You should probably try to adjust for such differences, if you want to make such comparisions. I used to work for the labor statistics branch of the U.S. Department of Labor. It was a building of economists, actuaries and statisticians. Meanwhile, in the rest of the economy, every new job being created was as a Wal-Mart greeter. Should the government number jockey take pay cuts because outside jobs are falling in quality or should they be compared to people holding similar jobs in the private sector? Also, many government workers are not in the Social Security system so a pension with a sixty percent replacement ratio is not as crazy as it sounds (and a sixty percent combined replacement ratio shouldn't sound crazy - that's a big part of the problem). Look at the fed programs (FERS and CSRS) to illustrate..."
  • Another reader said, after reading my words about taxpayer- public worker friction: "We have, in the words of EJ McMahon, a "public pension time bomb" on our hands that the ordinary taxpayer does not understand. See http://www.empirecenter.org:80/Special-Reports/2006/06/defusing_new_yo.cfm. In my local Long Island school district of 1,600 students, the average teacher is paid in excess of $93,000. That is a base salary only, no overtime, extras, benefits - It is outrageous."

If you want to comment, please email us. We want to hear what you have to say, especially in the spirit of nurturing an informed debate.

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You Can't Regulate Honor

Posted on March 20, 2009 by Susan Mangiero

As famed playwright George Bernard Shaw once said, "The most tragic thing in the world is a man of genius who is not a man of honor." I've been thinking about the "H" word a lot lately, especially given what seems like to be a never-ending onslaught of news items about fraud or outright bad practices. The current brouhaha in the Empire State is one example. 

In "Criminal Case Ensnares Aides to Ex-New York Comptroller" (March 19, 2009), Wall Street Journal reporters Craig Karmin and Peter Lattman describe a "pay to play" scheme that has the makings of a Hollywood thriller. Attempting to outgreed Gordon Gekko, several aides to a former New York State comptroller have been charged by the U.S. Securities and Exchange Commission with over 100 counts, including money laundering and bribery. According to the regulator's website (Litigation Release No. 20963), private equity and hedge fund managers were encouraged to pay many millions of dollars "in the form of sham 'finder' or 'placement agent' fees," expecting to secure asset allocation commitments from the New York State Common Retirement Fund.

Were this an isolated event (and to be fair to the defendants, these are only allegations at this point), people may be willing to look askance. Alas, we have Madoff, Sir Stanford, AIG bonus lunacy and so much more.

Not being a psychologist, I'm unclear as to why people conduct themselves in a questionable fashion. Some say that bad players rationalize their acts as short-term (not to be repeated) or legitimate entitlements ("I'm owed'). Even if one accepts fraud or sub-par practices as okay (and hopefully few do), it is not smart business. Ultimately, people get caught, even if it means mental anguish in the form of time spent, worrying about being found out, remorse or both. How sad too that innocent spouses, family members and children get a place in the "hall of shame," next to the responsible party.

I've made no secret that I'm an advocate of free markets. In response to several colleagues who demand even more mandates, my question to them is whether they think honor can be regulated. Pour moi, I think not. Force does not equate to walking a straight line.

If there is a silver lining to financial mishaps of late, perhaps it is this. More and more individuals (business persons or otherwise) are having lively debates about ethics, best practices and fiduciary standards. It's a great start, don't you think? 

One attempt at getting the message out is the recently published "Principles of Financial Regulation Reform: A Model for Change." Developed by CalPERS and other large public pension plans, the March 2009 document urges greater transparency and freedom to invest, "consistent with fiduciary responsibilities," without limitation "on the universe of available investments." Somewhat ironically, the New York State Common Retirement Fund is a signatory to this call for reform. (Could some of the newly minted principles have possibly forestalled or prevented the alleged fraud now being investigated by regulators?)

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Pensions Query Private Equity and Venture Capital Funds

Posted on March 14, 2009 by Susan Mangiero

According to Wall Street Journal reporter Heidi N. Moore, investing in certain private equity funds may no longer be a walk on the beach. Not content to sit passively on the sidelines, "Pension Funds to Private Equity: ABCD. Always Be Closing Deals." (March 13, 2009) describes a desire to shift power to pensions, endowments and foundations, away from portfolio managers. Cited reforms include: (a) contracts that mandate the return of money to limited partners within a pre-specified period, thereby truncating fees earned by private equity funds (b) clawback arrangements that allow general and limited partners to equally participate in big wins and (c) detailed evidence that committed monies are being invested rather than left idle.

In a related article entitled "Venture Capitalists Chart a New Course" (March 13, 2009), Wall Street Journal reporter Pui-Wing Tam writes that some venture capitalists may be moving outside their comfort zone by investing in distressed assets and public companies via "registered directs" and private investments in public equities ("PIPES"). Brandon Park, a financial professional who invests in venture capital funds on behalf of institutional investors is quoted as saying that "many venture funds have charters that allow a certain percentage of assets -- typically 10% to 15% -- to be invested in assets other than private start-ups."

Indeed, there are many changes afoot in the private capital arena. They potentially impact if, and how much, pensions, endowments and foundations allocate to this asset class.

  • The credit crisis has made it difficult to do deals that depend on leverage.
  • The time period before which a company is likely to go public or be acquired has lengthened, often forcing a general partner to (a) hold onto a portfolio company for a relatively longer period of time and/or (b) possibly requiring additional cash infusions by that general partner as a result of a longer holding period.
  • Some private capital partnerships are not establishing new funds. As a result, their need to preserve cash (i.e. to keep existing companies afloat) may create even more friction for limited partners which want to see new investments being made.
  • If passed into law, a proposed rule to change the way carried interest is taxed for general partners could impact fees charged to limited partners.
  • FAS 157 applies to many alternative funds and remains a due diligence item for institutional decision-makers who must understand valuation policies and procedures for "hard to value" asset pools. 

A big plus is that some private equity and venture capital funds find themselves in an enviable position to pick and choose from a bevy of investments as entrepreneurs find more traditional funding paths closed to them. Ultimately, realized returns, ownership privileges and qualitative practices will influence how much money pensions, endowments and foundations continue to plow into non-public opportunities.

Editor's Note: Here are a few resources for interested readers.

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Reading, Rithmetic and Retirement?

Posted on March 13, 2009 by Susan Mangiero

Bravo to Nathan Dungan and the person who hired him to teach seniors about the importance of saving. As shown in a recent Wall Street Journal video, this President of Share Save Spend asks students to think hard about "needs" versus "wants" as a way to better allocate scarce resources. According to "Teaching Money Values in School," only a handful of states mandate personal finance courses. For young people who live in the remaining 36 states, they are on their own, unless Mom and Dad practice thrifty habits at home.

As a former college professor, I was always aghast at the availability of credit to students who were barely of age. Easy sign-up tables with free gifts were a common sight on campus. Until about six months ago, money havens such as Greenwich, Connecticut were chock ablock with evidence of conspicuous consumption, even for toddlers.

Don't get me wrong. Parents with means have every right to spend their hard-earned money on whomever and however they choose. Yet one wonders. Will instant gratification as a youth challenge Generation X later on in life?

Someone told me recently that sales of board games are on the rise. Imagine. Spending time around the kitchen table playing Scrabble or Trivial Pursuit is seen by some as novel. As hard as things are for more than a few households, might some young adults benefit from having to learn the value of money and being encouraged to connect with others? (Don't get me started about the kids for whom the cell phone is an obsession. What ever happened to quietly reading on the train or plane?)

Editor's Note: Mark your calendars. April 21, 2009 is "Teach Children to Save Day." Until then, here are a few sites that provide information about teaching children how to save.

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Valuation Policies and Procedures

Posted on March 8, 2009 by Susan Mangiero

Tomorrow marks our second in a series of webinars about valuation. The March 9 event focuses on the creation of valuation policies and procedures. If you need help with your "hard to value" asset process, email PG-Info@pensiongovernance.com. Our valuation experts represent years of academic training, "roll your shirt sleeves up" practical experience and lots of common sense.

In the meantime, please take our short survey. We will be announcing the results soon. Click to answer a few questions about "Hard to Value Asset Policies and Procedures." Preliminary answers enlighten with 80 percent of respondents answering "Yes" to replacing an asset manager if the manager cannot properly value financial instruments. Three quarters of survey-takers cite concerns such as "auditor's ability to properly model financial instruments," "data quality," and "fiduciaries' ability to properly model financial instruments for oversight purposes."

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Pork Spending Gone Wild - Warning, R Rated News

Posted on March 8, 2009 by Susan Mangiero

Image Source: http://www.cagw.org

I awoke feeling zippy - another day, another gift of life. While I remain hugely appreciative for what I have (good health, great family and much more), I must say that watching Sunday talk shows does not inspire. Today's theme was the economy and what is being done around the world to get us back on track. Unless you've just come back from a remote island, you are all too aware that global economic conditions are anemic at best and on life support at worst. Adding hundreds of billions of dollars to our national debt is bad enough. Earmarking monies for questionable projects is beyond the pale.

Legislators everywhere - Practice what you preach. We don't care what political party you represent. We simply want to know that you are good investment stewards of our hard-earned money. If corporate executives are chastised for taking private jets with taxpayer dollars, why is it okay for you to seize our dollars for your pet project? Individuals everywhere are making tough decisions about their household finances. We don't get to print money. If it ain't there in the checking account, we make do. Why is that rocket science? Here are a few items to ponder.

  • Citizens Against Government Waste reports that proposed earmarks include $2.9 million more for shrimp acqualculture research, "being done in seven states, including Arizona, where the most likely outcome is the shrimp will just fry in the sun." (See "CCAGW Calls Failed Omnibus Vote an Urgent Wake-Up Call," February 12, 2009.)
  • Paul Kane of the Washington Post writes that manure management and water taxis have been given the thumbs up by the U.S. Senate. (See "Democrats Stop Effort to Remove Earmarks," March 5, 2009.)
  • According to IOUSA.com, a new film documentary about the U.S. debt, three programs alone (Medicare Parts A and B, Medicare Part D and Social Security) account for an eye-popping $53 trillion in present value terms (or an added debt burden of $175,000 per person). 

For plan sponsors, the state of the economy is the elephant in the room.

At the micro level, you are confronted with new challenges galore: (a) asset allocation revisions (b) whether to make up for losses by possibly doubling up on risk (c) longer lifespans and (d) new accounting and disclosure rules that give problem plans (regardless of plan design) nowhere to hide.

At the macro level, legislators are almost surely NOT going to take the blame for the inevitable fallout associated with underfunded retirement plans - lowering benefits, raising taxes or both. As the doubtful viability of Social Security and other entitlement programs becomes more apparent, plan sponsors will be handed the bill and told to "do something to help people retire in dignity."

No suprises here - This messge is R rated:

  • Recession
  • Regulation
  • Rationing
  • Retirement Postponed
  • Rough Times Ahead
  • Restrictions on Decision-Making Flexibility
  • Ridiculous Perversion of Economic Incentives

Send an email with your favorite "R" word and/or example of wasteful spending. Let's remind the spendthrifts on both sides of the aisle that every dollar they earmark is the result of someone's gainful employment and not to be frittered away.

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Profit Privatization and Socialization of Losses

Posted on March 7, 2009 by Susan Mangiero

Complex problems deserve a lively debate about potential solutions. That is why I've asked both colleagues and critics to guest blog on www.pensionriskmatters.com from time to time. Interestingly, few have taken me up on the offer (though I get plenty of emails about various posts). One person who has accepted the challenge to disturb and entice is Mr. Wayne Miller. Formerly CEO of Denali Fiduciary Management and a self-described passionate fiduciary advocate, Wayne invites readers to ponder his suggestions about how to (a) manage the current banking crisis and (b) save the U.S. Social Security system. When asked why he expended time in penning his thoughts, Wayne wrote that "there must be a very clear example as to how personal responsibility will be incorporated into a market principle-based framework that could lead us out of this storm" and move our nation away from "political expediency" in order to avoid being "condemned to stir inside the box we made for ourselves."

While Wayne and I have had more than a few lively debates about the merits of free markets, he and I agree that the improvement of investment best practices redounds to everyone's benefit. 

Read Wayne's proposal. Decide for yourself. You can sign his petition by visiting www.sociallyresponsiblerescue.org.

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Hard to Value Assets and Fiduciary Duties

Posted on March 5, 2009 by Susan Mangiero

Pension Governance, Incorporated will soon release two webinars on the important topic of valuation and investment fiduciary duties. In the spirit of providing impartial thought leadership and insight, our team has created a short survey about valuation policies and procedures and their relationship to asset allocation and manager selection, respectively.

Click here to take the survey entitled "Hard to Value Asset Policies and Procedures." The survey should only take about 3 or 4 minutes to complete. Results will be aggregated and published in several weeks. Individual responses will not be published nor will information about any respondent be made public.

In advance, many thanks for your time.

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Connecticut State Legislators Target Hedge Funds

Posted on March 4, 2009 by Susan Mangiero

  

 Following up on "Hedge Fund Haven Gets Double Whammy from Pension Plan and New Regulations" (March 2, 2009), here are links to the three regulations being considered by the State of Connecticut General Assembly:

Here are a few interesting questions.

  • If the Nutmeg State implements and enforces new hedge fund laws, anticipating that investors are now protected, how will they explain any future losses?
  • How will legislators seek to protect investors in the case of hedge fund look alikes? Federal Reserve Chairman Ben Bernanke referred to AIG as an "irresponsible" hedge fund. (See "AIG An 'Irresponsible' Hedge Fund, Regulators Say," FINalternatives, March 4, 2009.) A quick read of the aforementioned state proposals would suggest that these proposed laws will not apply to this insurance giant or other non hedge fund "hedge fund."
  • In the event that the U.S. Congress and non-U.S. regulators each create their own set of rules and they conflict with one another, which ones trump?
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Hedge Fund Haven Gets Double Whammy from Pension Plan and New Regulations

Posted on March 2, 2009 by Susan Mangiero

According to "Taxpayers may pay for pension shortfall" by Neil Vigdor (Greenwich Time - March 1, 2009), prosperity for this lovely Connecticut may soon be a distant memory. A recent meeting of town officials revealed that "the town's pension fund has lost nearly 24 percent, more than $100 million, since last year. Continued deterioration in the equity markets could lead to a $16+ million contribution in short order. Layoffs of public workers have already begun with more likely to come. Though some employees are being directed to 401(k) plans in lieu of the traditional defined benefit plan, municipal woes are a huge headache.

Making matters worse, Greenwich - the home of more than a few major hedge funds - may soon be slapped with onerous compliance costs if Nutmeg state legislators have their way. Hartford Business Journal reporter Greg Bordonaro writes that three bills could potentially roil an already challenged industry. One bill would prohibit investments in hedge funds for individuals (institutions) with less than $2.5 ($5.0) million in assets. Another proposed rule would force additional transparency for any hedge fund that take pension assets. Only time will tell if lawmakers get their way. Earlier attempts at state mandates were rebuffed, fearing that the state would lose tax revenue from wealthy hedge fund managers. However, choppy markets make alternatives a ripe target for attack. Should compliance costs soar, Greenwich town leaders will have more to worry about than pension deficits. As hedge fund attorney John Brunjes says, "It's a highly competitive business, so it would take very little in terms of regulation for hedge fund managers to consider doing business elsewhere." Click to read "Lawmakers Propose Stiff Hedge Fund Oversight.

What's interesting is that equity-related losses are tempting plan sponsors to accelerate their allocation to strategies that lure with the potential of higher returns. Whether doubling up makes sense is a topic for another day. However, alpha-seeking institutions may have nowhere to go if new rules depress expected returns by increasing costs. The counter argument is that regulations are long overdue. No doubt it will be an interesting year for hedgies.

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