Hedge fund investments cost public pension funds

Public pension funds over promise and need high returns to meet their obligations. They turn to hedge funds which alter portfolio according to the current conditions,  Read the whole article.

Zero Hedge:

 This is a persistent problem with public pension funds. In order to keep the present value of the liability from ballooning, managers need to cling to a 7-8% return assumption. Of course in a NIRP world, that’s next to impossible to achieve unless you reach for yield by “diversifying” into riskier asset classes. Here’s a graphic from a 2014 report from a panel commissioned by the Society of Actuaries:

Note, the alternative investment are the hedge funds.

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Well, public sector pension fund managers have apparently been completely oblivious to that point for the better part of a half decade and as Bloomberg reports, it’s cost them dearly.  
“The investment pools gained 0.4 percent through November, putting them on pace for the worst year since 2011,” Bloomberg says, before reminding the world that these things are blowing up faster than an ISIS oil convoy caught in the crosshairs of a Russian Su-34. “The industry’s struggle was underscored over the past two months as BlackRock Inc., Fortress Investment Group and Bain Capital closed hedge funds after running up losses.” 

Here’s more: 

The low returns are dealing a setback to governments that boosted exposure to hedge funds, seeking windfalls to help close a $1.4 trillion shortfall that’s facing public-employee retirement systems nationwide. The investment funds have underperformed stocks since 2008 as share prices rallied and volatility whipsawed global financial markets.

Public pensions count on investment returns of more than 7 percent a year, so anything less puts pressure on governments to set aside more to ensure they can cover all the benefits promised to employees.

With their investments faltering, funds with more than $16 billion of assets have announced plans to shut down this year, including those run by some of Wall Street’s most well-known firms, according to data compiled by Bloomberg. BlackRock decided to close its Global Ascent hedge fund following losses that triggered withdrawals by investors including the Arizona Public Safety Personnel Retirement System, Fort Worth Employees’ Retirement Fund and the Maryland State Retirement and Pension System.

The California Public Employees’ Retirement System, the U.S.’s largest public pension, said last year it would liquidate its $4 billion hedge-fund portfolio because of the cost and complexity.

Underscoring just how poorly these investments have performed especially considering the fee structure, Jeff Hooke, a managing director with Focus Investment Banking in Washington conducted a study with five state pension funds over five years which showed that the median return on hedge-fund investments a full 6 percentage points lower than a 60/40 equity-fixed income index fund managed by Vanguard. The expense ratio on the Vanguard fund: 0.23%. That’s a hell of a long way away from 2 and 20. 

Hooke’s conclusion: “Hedge funds have cost the states tens of billions in opportunity costs the last five years.” 

 My notes:

New York and California pension fun d managers have already notified state and local governments that pension remits will be increasing next year.  And Illinois is in cliff dive.  If we add in rising costs for retiree health care, then we have local governments facing a 5% rate hike in retiree costs. But local and state tax rowth