AUSWR
The Association of U S West Retirees
 

 

 

Pension bill stirs talk on retiree risk
By Beth Potter, Staff Writer
Denver Post
Monday, July 31, 2006

Some retirees in Colorado think hedge funds are too risky a place to invest their pension assets, no matter what Congress decides on a pending pension bill.

A provision in the bill moving through Congress would let hedge funds -- the scantly regulated managed investment funds that are gaining in popularity nationally -- to take on more pension fund money with less government scrutiny.

Hedge-fund managers contend the bill would provide greater flexibility and the chance for pension funds to select low-risk hedging strategies to offer safeguards against a market downturn.

At stake in Colorado is more than $44 billion tied up in managed retirement funds of groups like the Public Employees' Retirement Association -- all Colorado state and school workers -- and the Association of US West Retirees.

"I think it's too chancy," Nelson Phelps, executive director of the Association of US West Retirees, said of the new provision being debated.  "What (irritates) me about Congress, is, they're supposed to strengthen plans for retirees, and instead they're trying to sneak in this piece."

Local hedge-fund managers, however, say the risk of their investing varies from fund to fund.

"It's a case-by-case situation of how risky the funds are," said Jerry Paul, a hedge-fund manager at Greenwood Village-based Quixote Capital Management.  "It's incredibly arrogant of those critics to say hedge funds are too dangerous."

During the past five years, Paul said, pension funds, foundations and university endowments have increasingly turned to hedge funds as alternatives to traditional investments such as stocks and bonds.  He noted that some pension funds now have as much as 30 percent to 40 percent of their assets in various types of hedge funds.

"It gives pension funds increased flexibility, and I can't see what's wrong with that," said Paul, referring to the pension bill.

Hedge fund managers favoring the provision say they should not be bound by a government requirement to become fiduciaries, which gives them specific legal obligations toward workers and retirees under federal law.

Right now, hedge funds are required to become fiduciaries if pension-fund money makes up more than 25 percent of their investment portfolio.

Hedge funds should be allowed to police themselves, said Jack Gaine, president of the Managed Funds Association, an industry trade group that has been pushing for the change.

"Becoming a fiduciary entails a lot of complications and difficulties, which makes it very unsatisfactory.  It's very time-consuming and prohibitive," Gaine said.

Hedge funds have surged in popularity in recent years as investors use complex trading strategies to go after large gains.

The hedge-fund industry already manages billions of dollars for companies and government-sponsored plans with assets of about $1.2 trillion.

While Colorado-PERA invests 8 percent of the $35 billion it controls in an alternative investment class, hedge funds are still seen as too high-risk, said Katie Kaufmanis, a PERA spokeswoman.

Kaufmanis pointed to PERA's 9.8 percent return on its investment in 2005, above the 8.5 percent planned rate of return, as proof that its conservative investment strategy works.

Staff writer Beth Potter can be reached at 303-820-1503 or bpotter@denverpost.com.

http://www.denverpost.com/business/ci_4115183