Ohio pension funds lost out on $1.6B extra

3 paid $1.1B in fees for hedge fund investments

10/25/2016

THE BLADE
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COLUMBUS — Three Ohio public pension funds earned $1.6 billion less than they might have if they’d stayed out of hedge fund investments while still paying $1.1 billion in fees for the privilege, according to a new report released Monday.

Many pension funds nationally turned to hedge funds in hopes of recouping some of the losses experienced in the last recession and to diversify their investment portfolios. Hedge funds are lightly regulated, pooled funds that target alternative investments in hopes of providing stronger, more consistent returns.

But an Ohio-specific update to a national study released last year determined that hedge funds have underperformed compared to more traditional investments, particularly when the funds’ higher fees are factored in.

In 2015, hedge funds experienced their worst year since the recession ended.

“We are very concerned about hedge-fund billionaires using our deferred wages to enrich themselves while we’re worried about whether we’ll be able to retire with dignity,” said Melissa Cropper, president of the Ohio Federation of Teachers.

“After losing between 20 to 25 percent of their value during the Great Recession, three of Ohio’s largest pension funds had to impose painful changes on working people by increasing the retirement age and hiking up employee contributions,” she said.

The Ohio Federation of Teachers, the Ohio Education Association, and the Ohio Conference of the American Association of University Professors are among the members of the Ohio Hedge Clippers coalition. They represent some members of the Ohio Public Employees’ Retirement System, covering most government workers; the State Teachers Retirement System, serving educators, and the School Employees Retirement System, representing nonteachers.

The pension systems are funded by contributions from employees and employers as well as returns on investments.

According to the study, hedge-fund investments underperformed the rest of the systems’ portfolios by $1.6 billion since the recession. On top of that, hedge-fund managers charged $1.1 billion in fees — 63 cents for every dollar of net return compared to 5 cents for the rest of their portfolios.

In addition to the equation’s financial side, the unions object to some hedge funds investing in companies that, they say, have sought to undercut workers and defined pension systems.

“We want to make sure that our money is going to people who are going to support public education, support unions, and support workers,” Ms. Cropper said. “... Otherwise, we’re paying money to eliminate ourselves.”

Pension funds in some other states, such as California, have already moved to get out of hedge funds altogether.

Although Ohio’s pension funds have sometimes negotiated better deals, hedge-fund managers generally charge a 2 percent annual fee on the total investment and then take 20 percent of the annual gain.

SERS spokesman Tim Barbour said that over the last three years, the system’s hedge-fund investments have returned 2.73 percent after fees. Over five years, the return has been 4.06 percent. Both are well below the 7.5 percent target for the entire investment portfolio.

He said the fund has reduced its exposure from 15 percent of its portfolio in 2010. It is doing an asset allocation study that should be completed by December, so more changes may be coming.

“The hedge funds for us provide diversification in our total funds,” Mr. Barbour said. “... They’re also supposed to reduce risk for the total fund on the downside if there’s a big dive in the market. They have served that purpose, but the overall total returns have not been what were promised.”

Elizabeth Parisian, assistant director for research and strategic initiatives with the American Federation of Teachers and a co-author of the report, said the overall fee picture is often not transparent.

“Part of gauging diversification is taking into account the costs, and if you don’t have a clear picture on costs, it’s very difficult to determine the diversification value to the fund,” she said.

According to the study, PERS had 12.9 percent of its $86 billion portfolio in hedge funds. SERS invested 10.7 percent of its $12.4 billion, and STRS invested 2.5 percent of its $70 billion in hedge funds.

The union representatives participating in Monday’s news conference said they have seen no evidence suggesting that hedge-fund managers have had undue influence on pension system trustees who make investment decisions.

Mark D. Lay, a Pittsburgh investment manager, is currently serving a 12-year sentence in federal prison for fraud related to $213 million in losses in a hedge-fund investment he managed on behalf of the Ohio Bureau of Workers’ Compensation.

Contact Jim Provance at: jprovance@theblade.com or 614-221-0496.