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  

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