Saturday, November 28, 2015

Pension matters: Obfuscation on hedge funds and 'absolute return', November 29, 2015


ˈäbfəˌskāt/, verb
  1. - render obscure, unclear, or unintelligible.

Pension matters update:

The draft Memorandum of Understanding with its potential risks to the system of checks and balances that has kept our Fund healthy for 65 years was placed in the deep freeze by the Under-Secretary-General for Management, Yukio Takasu, this past July and, hopefully, will remain safely on ice. Still, despite consistent and more frequent reporting in the media (see previous post titled 'Pension gaps remain while hedge funds gorge on fees'), it's unclear to what extent the reality of the pitfalls of riskier investments such as hedge funds has been taken on board by the Fund's investment decision-makers, i.e., the RSG, the Investments Committee, the Pension Board, or, for that matter, by the leadership of our UN retiree representative organization, AFICS. 

We're currently wading through the report of the Pension Board Chairman to the Fifth Committee (Nov. 10, 2015), and the Pension Fund's report to the GA (August 14, 2015) posted on the AFICS website (links below). 

The report is posted on the AFICS website with no comment.  We look forward to the day that the AFICS leadership might consider going a step further to provide some brief commentary on the most relevant sections of these, often specialized and technical, reports (206 pages long in this case) for the benefit of its membership.

Here's what we've noticed so far from the report: The section titled 'Investment costs', para. 24 'Consultants, underexpenditures' notes the following: "The hedge fund monitoring consultancy will not be implemented, given that the selection of a hedge fund adviser is now in progress." 

So the hedge fund consultancy is out, because selection of an adviser (presumably a more permanent position) is in progress. We believe that's meant to be good news. 

In para.146, Investments Section, Indicators of achievement, "By the end of 2015, the Fund expects to be committed to 30 to 40 private equity and hedge fund managers. An additional Investment Officer for Alternative Investments was approved and is being added to the team. A request for proposal to hire a hedge fund non-discretionary adviser will be published late in 2015. . . The Fund expects to have a small portion of its overall portfolio invested in an absolute return strategy, including hedge fund and commodity investments. . . Benchmarking for the Fund's absolute return strategy portfolio will be discussed and decided upon with the hedge fund adviser." 

Can anyone explain the difference between a hedge fund adviser, whose recruitment is apparently in progress, and a hedge fund non-discretionary adviser, for whom a proposal to hire 'will be published late in 2015?' One hopes whoever they are, they're assiduously educating themselves on the pitfalls of investing in hedge funds, period. Anyone able to shine a light on relevant sections of the report, please do so."

A Facebook Group (see link on main page) participant shed some light on 'absolute return':

"Breaking down 'Absolute Return' In general, a mutual fund seeks to produce returns that are better than its peers, its fund category, and/or the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. 

"Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets." This is exactly what we don't want. These are all the dubious and high-risk methods that investment people use to lose money in great quantity. So once again we're being misled by terminology that sounds reassuring. Who could be against "Absolute Return"?"

Another  Facebook Group participant offered this comment: 

"The main point is to remain really vigilant on what type of investing mechanisms our pension fund is embarked on -or planning to do so- keeping in mind that there is an actuarial requirement to keep an actual 3.5% rate of return for the fund to remain viable. This requirement may induce investment managers to get into riskier schemes (nor necessarily in bad faith). The traditional asset classes (shares, etc.) are getting to a point of full maturity and given the little economic growth the whole world is facing, the challenge of getting satisfactory returns is even higher. What has been since long ago highlighted as a perversion is that hedge fund managers are not paid by results but as a percentage of capital investment, thus no incentive for making sound decisions to benefit their clients. Granted, pension fund managers may have been extremely naive (with some bad apples in between) to the grandeur of promises from hedge fund managers and tht is precisely where our eyes should be now. One initial point in the quest for more transparency would be, for example, that returns are reported as income while commissions reported as costs; currently only the net is reflected as income and thus impossible to see the reality behind the scenes."

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