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Pension board affirms strategy of hedge funds

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COLUMBUS — Despite opposition from two members, the board of Ohio’s largest public employees’ retirement system decided Tuesday to stand firm in its exposure to hedge funds as part of its overall investment strategy.

Some public pension funds in other states such as California and New York have moved in the opposite direction, but the majority on the Ohio Public Employee Retirement System said that despite higher fees and poorer recent returns, hedge funds provide diversity and stability in uncertain times.

“Basically, we’re taking all the risk for the most part,” said Steve Toth, who opposed the allocation. He represents retirees on the PERS board of trustees.

“The hedge fund managers have minimal risk involved, and they’re making just as much money as we’re making,” he said. “If we’re interested in volatility, there are other investment instruments that we can invest in and get the same results that we’re getting through these hedge funds.”

Managers of hedge funds — lightly regulated, pooled funds that target alternative investments — have promised stronger, more consistent returns. Many retirement systems increased their exposure in the wake of the 2008 recession to try to recoup some of their losses and serve as a “hedge” against future volatility.

But hedge funds have underperformed other investments in recent years while their higher fees have eaten into the earnings.

“Hedge funds have returned over 4 percent over the last five years,” said Rick Shafer, PERS’ chief investment officer. That’s below the overall investment target of about 7 percent but better than the performance of bonds.

He said it’s not appropriate to compare hedge fund returns to the stock market.

“Our hedge funds take one-fifth of the volatility risk that the stock market takes, so you should expect one-fifth of the stock market return almost,” he said.

The board voted 7-2 to make minor adjustments to its investment strategy for this year, choosing to keep the pension benefits’ exposure to hedge funds at 8 percent of its $87 billion total fund. The exposure for investments in the system’s separate health-care fund is 6 percent.

The system has a total of $6.5 billion invested in hedge funds between both funds.

A study released in October by the Ohio Hedge Clippers coalition — consisting of teachers and university-faculty unions whose members are part of the pension systems — found that three of Ohio’s largest pension funds earned $1.6 billion less that they might have if they’d stayed out of hedge funds after the recession. At the same time they paid $1.1 billion in fees.

PERS is the nation’s 11th-largest pension fund, with about 1 million nonteacher, nonlaw-enforcement members who work or had worked in state and local government.

Generally, hedge fund managers take 2 percent of the total investment annually as a management fee, then take about 20 percent of any gains as a performance fee. PERS said it has negotiated the management fee down to an average of 1.25 percent.

While the board voted to keep its 8 percent exposure, members agreed that the fund should do more to reduce those fees.

“How long do we continue to get clobbered like this, because the definition of insanity is to continue to do the same thing over and over and expecting something different,” Mr. Toth said.

Aristotle Hutras spent more than two decades as executive director of the Ohio Retirement Study Council, a panel of lawmakers and gubernatorial appointees that monitors the health of Ohio’s public employee retirement systems.

Now, like any other public retiree, he watches how the board handles his money. He knows the vast majority of money that will pay for his benefits over the years will be from investment earnings, not from employee or employer contributions.

“Healthy discussion. That’s what should be happening,” he said, noting board members are legally required to act like any “prudent person” when deciding investments.

“If it weren’t prudent, they wouldn’t do it,” he said. “The 2-and-20 [fee] rule…, I’d say everybody in there felt that we’re not getting the bang for the buck.”

Contact Jim Provance at: or 614-221-0496.

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