Last week, Breitbart News noted that Texas public pension plans had the highest asset percentage of any state pension program invested in hedge funds, with one plan at almost a quarter of assets invested. It didn’t take long for Texans to start asking questions–such as why 90% of hedge fund managers are overpaid for the returns they produce. On September 19, the Teacher Retirement System of Texas (TRST), the sixth-largest public pension in America, announced that it is, like California’s CalPERS, dumping some hedge funds.
TRST, which likes to be referred to as “trust”, said the decision will enable the Texas fund to reduce equity exposure and raise fixed income exposure. But it seems more likely that the real reason is the example set by the California Public Employees’ Retirement System (CalPERS), which began dumping all their hedge fund investments after their former CEO, Federico R. Buenrostro, Jr., was convicted for committing hedge fund fraud amounting to hundreds of millions of dollars.
Traditional SEC registered money managers, who have provided investment advice to public pensions for decades, only charge an annual fee of 0.5% of assets under management. Yet the typical hedge fund charges an annual 2% management fee, and then takes another 20% chunk of all profits the fund produces as a bonus. This is sarcastically referred to on Wall Street as taking another “slurp at the trough.”
Pension cash of America’s largest 200 defined-benefit plans invested in hedge funds leapt 15.1% last year, and now stands at $150 billion. Although many hedge funds promise high investment returns, most have under-performed market indexes recently.
Preqin Alternative Asset Analysts recently reviewed the degree to which hedge funds control public plan cash. Preqin reported that while pension plans have been investing in hedge funds for decades, over the last five years, the number of public pension plans investing in hedge funds grew 15%, from 234 to 270 plans. The percent of assets of public fund assets invested in hedge funds also jumped by 20%, from 7.2% to 8.4%.
According to a hedge fund products analyst at Preqin, “With CalPERS joining the ranks of a handful of other high profile US pension schemes cutting back on hedge-funds, there could be concerns that these public retirement systems are losing faith in the asset class as a collective.”
Public pension plans in Texas are undoubtedly now under heavy scrutiny for being the heaviest players in the hedge fund system. The $126 billion Texas Teachers’ pension program, with an unfunded pension liability of about $28.9 billion, moved quickly to announce that it will be cutting hedge fund management from 9% of its investments to 8%.
Expect other public pension plans in Texas and around the nation to do likewise.
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