Wednesday, February 28, 2007


Can Pension Funds Forgive Hedge Fund Failures?



According to David Hammerstein of Yanni Partners, ("Fewer Second Chances For Failed Fundies" - Hedge Fund Daily, February 27, 2007), "There is an extra standard of caution and care that has to be demonstrated among institutional investors" when it comes to giving failed hedge funds another chance. Noting the significant amount of pension dollars going into alternatives, Hammerstein emphasizes the need to assess risk controls.

He's not alone. Next week, I will join other speakers at the 23rd Annual Risk Management Conference to wax and wane about all sorts of investment-related risks. Hosted by the Chicago Board Options Exchange, Chicago Board of Trade, Chicago Mercantile Exchange and OneChicago LLC, the conference brings together a variety of researchers, investors and consultants.

My presentation is entitled "What Every Institutional Investor Fiduciary Must Know About Derivatives" and will cover investment fiduciary practices related to risk control. (Click here to view the agenda.

Can the risk lion be tamed?

Absolutely - but only if one is willing to open the cage door and acknowledge its presence!

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posted by Susan Mangiero at 2/28/2007 06:12:00 AM | 0 comments | links to this post  

Saturday, February 24, 2007


Pensions, Hedge Funds and Risk



On February 22, 2007, the President's Working Group on Financial Markets (PWG) released a set of principles and guidelines concerning "private pools of capital, including hedge funds." In concert with various U.S. agencies, the PWG report urges investors, creditors, counterparties, pool managers and supervisors to identify and understand fund-specific risks or walk away.

For fiduciaries, the guidelines (some of which are excerpted below) are clear. Individuals who are unable to demonstrate that a rigorous investigation of risk has taken place, BEFORE investing, put themselves in the line of fire with respect to personal and professional liability.

<< 1. Fiduciaries should consider the suitability of an investment in a private pool within the context of the overall portfolio and in light of the investment objectives and risk tolerances.

2. Fiduciary evaluation should include the investment objectives, strategies, risks, fees, liquidity, performance history, and other relevant characteristics of a private pool.

3. Fiduciaries should evaluate the pool’s manager and personnel, including background, experience, and disciplinary history. Fiduciaries also should assess the pool’s service providers and evaluate their independence from the pool’s managers.

4. Fiduciaries should consider the private pool’s manager’s conflicts-of-interest and whether the manager has appropriate controls in place to manage those conflicts.

5. Fiduciaries should conduct the appropriate due diligence regarding valuation methodology and performance calculation processes and business and operational risk management systems employed by a private pool, including the extent of independent audit evaluation of such processes and systems. >>

It will be interesting to watch what happens. Will some pension decision-makers forego investing in alternatives because the risks are considered too difficult to understand, let alone accept? Who will embrace the challenge and recognize the reality that risk management is an integral part of investment management? You simply cannot select funds without understanding how managers address financial and operational risk. When a fund invests in less liquid and/or complex instruments, the plot thickens.

Click here to read Agreement Among PWG and U.S. Agency Principals on Principles and Guidelines Regarding Private Pools of Capital.

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posted by Susan Mangiero at 2/24/2007 06:30:00 AM | 0 comments | links to this post  

Sunday, February 11, 2007


Nutmeg State Seeks Pension Disclosure from Hedge Funds



According to reporter and financial professional Julie Fishman-Lapin, Connecticut could soon become less hedge-fund friendly if state legislators have their way.
In " State readies for a debate on regulation..." (Greenwich Times, February 9, 2007), Fishman-Lapin describes an initiative by Fairfield County Republican John E. Stripp that, if passed, would "require Connecticut-based hedge funds that receive more than $10 million from a pension fund to report the investment to the state banking commissioner within 30 days. The disclosure would include the name of the pension fund, the beneficiary organization and the address of the fund manager." Click here to read Proposed H.B. No. 5102, Session Year 2007 - An Act Concerning Hedge Fund Activity With Respect To Pension Funds.

Democratic state senator Bob Duff cites hedge fund disclosure requirements as part of his overall intent to focus on consumer protection. He will soon introduce a bill that likewise emphasizes disclosure. Click here to read his January 25, 2007 press release.

On December 5, 2006, addressing the U.S. Senate Committee on the Judiciary, CT Attorney General Richard Blumenthal urged federal regulators to increase penalties for fraud, raise the amount of money to qualify investors and adopt federal standards before states take matters into their own hands. Click here to read his remarks. Blumenthal is walking the walk, having formed the Hedge Fund Task Force last fall. The goal? To improve things and hopefully avoid an expensive Amaranth-type meltdown. (See "Hedge hunting season in Connecticut - In the wake of the Amaranth disaster, Connecticut Attorney General Richard Blumenthal seeks to reform the hedge fund industry" by Ellen Florian Kratz, Fortune, October 4, 2006.)

There is so much to write about the hedge fund - pension fund nexus. We will continue to focus on this important topic area. Until then, and in case you missed them, here are a few links to prior blog posts about hedge funds, along with links to some articles about hedge fund risk management and valuation.

Hedge Fund Notables for Pension Investors (December 29, 2006)

Hedge Fund Disclosure - Round Three (November 12, 2006)

Will Private Equity Stay Private? U.S. Dept. of Justice Makes Inquiries (November 5, 2006)

Pensions, Hedge Funds and Disclosure (October 27, 2006)

Legislative Matchmaker: Hedge Funds and ERISA (August 1, 2006)

Survey Shows That Institutional Investors Are Worried (July 28, 2006)

Will Hedge Funds Displace Pension Plans in Court? (July 9, 2006)

Hedge Fund Valuation: What Pension Fiduciaries Need to Know (Journal of Compensation and Benefits - July/August 2006)

Do You Know the True Cost of Your Retirement Plan? (May 14, 2006)

Hedge Fund Basics: Risk, Return and Reality (Family Foundation Advisor - January/February 2005)

Hedge Fund Imperatives (Hedge Fund Manager - December 2004)

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posted by Susan Mangiero at 2/11/2007 12:20:00 AM | 0 comments | links to this post  

Friday, December 29, 2006


Hedge Fund Notables for Pension Investors



Given the flood of money making its way from pension land to alternatives, fiduciaries may be interested in today's New York Times article entitled "The Private Lives of Hedge Funds." Reporter Jenny Anderson celebrates the panache of more than a few hedgies with a colorful description of the Houdini award, the Better-Than-Barings Blow-Up award, and the Debutantes award, to name a few.

Mr. Phillip Goldstein gets the Braveheart award for playing David to the SEC Goliath when he questioned their authority to have hedge funds register. After winning his case, he has since taken to the airwaves, campaigning to be exempted from disclosing details about his fund's holdings.

I have written about Mr. Goldstein on three occasions as part of a continuing commentary about transparency versus the protection of proprietary (and arguably valuable) information. While this issue remains unsettled as of today, it's noteworthy that over 1,200 hedge fund professionals showed up at a recent industry event to hear about topics such as the impact of newly released AICPA document, "Alternative Investments Audit Considerations: A Practice Aid for Auditors". For those who have yet to read this beauty, auditors must have sufficient data to support fund valuation numbers, including position detail.

Here are the links to the three aforementioned posts.

1. "Pensions, Hedge Funds and Disclosure" (October 27, 2006)

2. "Will Private Equity Stay Private? U.S. Dept. of Justice Makes Inquiries" (November 5, 2006)

3. "Hedge Fund Disclosure-Round Three" (November 12, 2006)

Is this the start of a new trend?

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posted by Susan Mangiero at 12/29/2006 12:30:00 AM | 0 comments | links to this post  

Monday, December 11, 2006


Leverage: Friend or Foe to Pension Investors?



In today's New York Times, reporter Jenny Anderson talks about lackluster returns for some hedge funds. In "Hedging '06: Year to Read the Caveats," she quotes Christy Wood, CALPERS senior investment officer, as saying that this year marks the third year that "the global equity markets and long-only managers outperformed hedge funds" and that "If you threw all these in an index fund net of fees, you would have done better than if you put it in the hedge fund industry."

The article continues that CALPERS has another $3.5 billion to invest, beyond the existing $4 billion in hedge fund investments. Their appeal, says Ms. Wood, is equitylike performance with bondlike risk.

The numbers are compelling. Courtesy of data from Hedge Fund Research, the article describes inflows in excess of $110 billion through Q3-2006, compared with $47 billion last year.

What caught my eye is the quote about leverage and the notion that markets have all but ignored situations like Amaranth and its reported $6 billion loss.

Excerpted from this piece, investment advisor Stewart R. Massey, founding partner of Massey, Quick & Company, is quoted as saying that "If there's a lesson in 2006 - and no one talks about it anymore - it's that leverage is a very dangerous thing" and "there's too much out there."

On the face of it, leverage is not necessarily bad (nor is it necessarily good). However, in bad times, levered investments can cause significant harm to a pension fund portfolio. Let's hope that fiduciaries are asking good questions about leverage and not forgetting that things can sour quickly. Far from an exhaustive list, here are a few basic queries for hedge fund managers.

1. How does your fund measure leverage?

2. What is the fund's average leverage measurement?

3. Are there particular market conditions and/or investment positions that worsen leverage?

4. What is the fund's stop-loss policy as a way to curtail trouble before it's too late?

5. How does the fund value its "hard-to-value" positions and what is the likely impact on reported leverage?

6. Does the fund's leverage vary over time or has it been relatively stable?

7. How does the fund's leverage metric compare with similar strategy hedge funds?

8. How does the fund' return compare with similarly leveraged peers?

9. Does the fund's risk management policy address leverage?

10. Does the fund plan to do anything different going forward that would materially impact leverage? If so, why and what policy changes will occur as a result?

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posted by Susan Mangiero at 12/11/2006 08:56:00 AM | 0 comments | links to this post  

Monday, December 04, 2006


Hedge Funds, SEC and Sunshine



In compliance with the provisions of the Government in the Sunshine Act, the SEC will hold a meeting today to discuss a variety of things, including the proposal of new rules to determine whether to (1.) "revise the criteria for natural persons to be considered 'accredited investors' for purposes of investing in certain privately offered investment vehicles" and (2.) "prohibit advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds."

Click here for the meeting announcement and here to access the webcast.

While both items merit discussion, the issue of accredited investor qualifications got people talking over lunch a few days ago. The current definition, pursuant to the General Rules and Regulations promulgated under the Securities Act of 1933, Rule 501, Definitions and Terms Used in Regulation D, applies various criteria including whether someone's individual net worth, "or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000."

In the event that the SEC applies more rigor to the definition of accredited investor, how will they proceed? Will they increase the minimum net worth number and if so, why? Is the implication that wealthier investors are smarter or just that their losses don't count as much in proportionate terms? While accredited investors are excluded for purposes of calculating the number of purchasers under relevant securities rules, why is a "non-contributory employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974" counted as one purchaser when the "trustee makes all investment decisions for the plan?"

Hopefully a detailed explanation will accompany any decisions made in the aftermath of this meeting. Better understanding what responsibilities regulators want each hedge fund investor to shoulder by virtue of changing the rules can only be a good thing.

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posted by Susan Mangiero at 12/04/2006 12:02:00 AM | 0 comments | links to this post