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Hedge Funds And Pension Funds

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Interesting read on how the Hedge funds are moving in on Pension Fund money;

When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.

But you probably shouldn’t.

An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.

The question, then, is why. When The Economist magazine reports that “the average return of hedge funds has lagged a plain-vanilla portfolio (in) nine of the past ten years,” why are pension fundsdumping so much cash into high-fee hedge funds? When none other than Warren Buffett is telling his own trustee to only invest his money in government bonds and cheap index funds, why are public pension officials nonetheless putting retiree money into high risk private equity firms? In short, why have public pension funds been so aggressively moving money into these alternative investments?

Kentucky fried pensions;

Tobe says the Kentucky Retirement Systems fits this description. He points out that according toKRS financial statements, Kentucky invests an above-average 34 percent of its assets in “alternatives.” That strategy last year delivered roughly 12 percent returns for KRS – far below the 16 percent median for public pensions. The high fees involved in such “alternatives” may help explain, in part, why a December 2013 KRS presentation (embedded below) shows the pension system is now just 23 percent funded – a rate that Tobe says is one of the worst in America.


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I am a teapot.


For years it seemed nothing could slow down the tsunami of junk debt. Yield-desperate investors, driven to near insanity by iron-fisted central-bank interest-rate repression, were holding their nose and closing their eyes while grabbing the riskiest paper under the crappiest conditions from the bottom of the barrel in their no-holds-barred chase to get a tiny little bit of extra yield.

The first unpleasant whiffs of reality are descending on a seamy corner of the biggest credit bubble in history that the Fed created by printing a few trillion dollars, imposing financial repression via its iron-fisted zero-interest-rate policy, and wringing out the silly idea that investors should be compensated for risk. But now at least some investors are opening their eyes a teensy-weensy bit, and they recoil at what they see, and they fear the losses coming their way.

If more investors let go of their nose long enough to smell those whiffs of reality, the largest credit bubble in history, with all its distortions and absurdities, would be pricked by nothing more than the simple absence of insatiable demand. As always, the dumb money will pay dutifully, but even the smartest money is already getting tripped up.

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