September 24, 2014

Auditor General Urges School, State Pension Systems To Avoid Hedge Fund Investments

Auditor General Eugene DePasquale Wednesday urged leaders of the state’s two pension systems to reconsider the $7.6 billion invested in potentially high-risk, high-cost hedge funds.
“With all of the talk about Pennsylvania’s public pension challenges, I want to ensure that the tens of billions of dollars the plans are investing are getting the best return at the lowest cost,” DePasquale said. “When I see that the nation’s largest public pension fund is getting out of hedge funds to ‘reduce complexity and costs’ in its investments, it is certainly worth looking into the issue in Pennsylvania.”
Last week, the California Public Employees’ Retirement System(CalPERS), announced it would divest itself of the $4 billion it has invested in hedge funds.
Based on their most recently available audited financial statements, Pennsylvania’s two largest public pension plans, Public School Employees' Retirement System (PSERS) and the Pennsylvania State Employees' Retirement System (SERS) collectively have investments totaling $77 billion. Of that total, PSERS has $5.7 billion, 12 percent, invested in hedge funds; SERS has $1.9 billion, 7 percent, invested in hedge funds.
“Hedge fund investments may be an appropriate strategy for certain investors and I trust that SERS and PSERS weigh investment options carefully,” DePasquale said. “But, SERS and PSERS are dealing with public pension funds that are already stressed and high fees cost state taxpayers more each year. I support full disclosure of hedge fund fees paid by our public pension funds and we owe it to taxpayers to ensure that those fees do not outweigh the returns.”
Hedge funds are an investment alternative often only available to institutions and individuals with significant investment assets. Depending on the amount of assets in the hedge funds, investment managers may not be required to register or to file reports with the U.S. Securities and Exchange Commission.  Additionally, these investment managers may charge high fees.