The State Investment Council that manages the public pension fund investments split 7-7 on a move to slash the stake in hedge funds from about 12 percent of the total investment portfolio to less than 4 percent.
So contentious was the action that Guy Haselmann, managing director at OpenDoor Trading and a member of the investment council, threatened to resign if the council slashed these investments, which he said would violate his responsibility to the fund.
Alternative investments, and hedge funds specifically, have been a matter of disagreement between union leaders who say the assets don’t pull their weight or warrant the high fees charged by managers, and investment representatives, who argue they provide a safety net in market downturns.
The fund paid out $400 million in management fees and $328.4 billion in performance bonuses for its alternative investments, which make up about a third of the total portfolio.
Haselmann defended the state’s investment strategy, arguing that “hatred of hedge funds” is based somewhat on a misunderstood fee structure that rewards fund managers for strong performance.
“This is your money,” he told the union workers in the audience. “I came onto this board as a volunteer. My mom and dad’s money is in this fund. I wanted to use my several decades of experience in really what amounts to portfolio construction to build the best risk-adjusted portfolio.”
“Deep in my heart, I believe that there is no worse time in my entire career to increase the allocation to stocks and bonds,” he continued.
McDonough said he was “shocked and frankly disappointed” council members were still suggesting that alternatives have not boosted the overall portfolio, when they have outperformed traditional investments and added billions of dollars to the fund.
What would inform this discussion is if someone on that board realized:
- If you raise your investment in alternatives threefold then your fees should go up proportionately. If that money were used to buy stocks or bonds instead there would also be fees (even if hidden).
- Hedge fund fees are based on performance and the hedge funds themselves get to value their products. The higher the value they put on what they are selling the larger their fees.
Then we could get to the real question. Are those alternative investments really worth what the hedge fund people say they are worth?