Wednesday, May 6, 2015

Hedge Fund Billionaires versus an Auditor: Utah Retirement System

Hedge Fund Billionaires versus an Auditor:  Utah Retirement System

I spent the morning reading “A Performance Audit of URS’ [Utah Retirement System] Management and Investment Practices,” a report written by the Utah Office of the Legislative Auditor General.[1]  Ironically, Institutional Investor’s Alpha published its list of the highest paid hedge fund managers for 2014 on the same day.[2]  According to Alpha, the top 25 managers took home $11.6 billion compared to $21.1 billion in 2013.  Why the sharp decline?  As a whole, hedge funds failed to deliver.  Nonetheless, the top hedge fund managers still took home an average of $467 million apiece.   To be clear, this figure isn’t what the average large firm earned, but what the principal portfolio manager/owner netted. It’s hard to fathom why anyone should earn this type of compensation, let alone for mediocre performance, which brings me back to the Auditor General’s report.

Among numerous recommendations, the report suggests that Utah ought to reconsider its 16.7% allocation to hedge funds because they’ve failed to deliver in the past five years.  While this conclusion is reasonably well grounded, the analysis didn’t go nearly far enough.  First, the report only utilized publicly available information (e.g., annual reports and information on URS’s website).  The auditor and the consultant hired by the auditor should have insisted on receiving detailed performance and fee data for every fund in order to understand completely the adverse implications of having made such a large commitment to hedge funds.  Second, the recommendation should have been stronger.  Instead of suggesting a reduction to the pensions’ hedge fund exposure, the auditor should be recommending its elimination from the plan.

The auditor’s report only begins to get at the extraordinarily high fees paid by the URS.  In the pension plans’ latest annual report, the pension only admits to incurring $48.9 million in management fees, which is ridiculously low given the plans’ 40% exposure to alternative investments.[3]  The auditor manages to ferret out another $205 million in fees.  However, I’m fairly certain that they’re still well short of the total fees incurred by the pension system.

Will the Utah Retirement System or the state’s legislature retreat from hedge funds or alternatives?  I doubt it.  As Alpha reports, the largest hedge fund managers are continuing to amass billions of dollars in wealth.  With their wealth and political power, the hedge fund industry will easily swat away the minor challenge of an auditors report.


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