By Susan Barreto
It's been more than a year since Hank Morris received a
four-year prison sentence for his role in the placement agent
scandal that brought to light 'pay-to-play' practices within
the New York State Comptroller's office, which oversees the
state's pension system.
Since the use of placement agents (a practice where managers
pay politically connected agents to help them win mandates)
came to light in New York roughly five years ago, it seems that
more public pensions have focused on what they are actually
paying their managers in both management and incentive fees.
Some of this action is due to plummeting hedge fund returns and
a willingness on the part of some firms to negotiate. In other
instances, it is a case of pension investment staffers
wondering what they were really paying for all these years -
performance or marketing.
In New York, for instance, a recent report from the
Independent Democratic Conference (IDC) found the New York
State Common Retirement Fund's investment portfolio has
actually reported negative growth since 2007, while management
and performance fees have risen by 160%. The research paper
adds that in 2008, the New York pension system paid $272
million in fees. The following year, when the market crashed
and the pension fund lost $45 billion, the pension fund paid
even more in fees.
Hedge funds, which were at the centre of the 'pay to play'
scandal, are the main culprit for the rising fees in New York,
say critics. The IDC found that in 2010 when hedge funds
underperformed equities, the pension fund paid $50 million in
fees. Then in 2011, when hedge funds delivered the worst
returns of any asset class, the pension fund paid the most it
ever paid to hedge fund managers - roughly $123 million. The
public-interest group has plans to draft legislation requiring
public, online disclosure of all management and performance fee
Comptroller Thomas DiNapoli has disputed the report's
findings, claiming that the IDC did not take into account that
the pension fund's assets under management have fluctuated
significantly over the past several years, which also drives
fees. Perhaps the biggest part not taken under consideration
was the move away from funds of hedge funds to a broader direct
hedge fund programme, which was originally put in place to save
In fact, in other states where placement agent scandals hit
home (such as New Mexico and California) most pensions have
generally taken on more single-manager hedge funds at the
expense of FoHFs - in the name of saving fees. In general, many
public pensions have embraced the direct-allocation approach
and use of specialist consultants in the name of fee reduction
see March's Institutional Letter).
In New Mexico, the $15 billion retirement fund has had
redemptions totalling more than $1 billion since 2008 and saw
liquidations of 13 funds, leaving only three FoHF managers in
the portfolio. In California, 2008 marked a time of significant
negotiating with hedge fund managers lowering fees in exchange
for longer lock-ups or other provisions.
In an independent report on the Kentucky Retirement System,
attorney Edward Siedle recently pointed out that following a
review of placement agents at CalPERS, the pension plan was
able to negotiate $215 million in fee reductions from
alternative asset managers. Kentucky also has found itself in
the middle of a placement agent scandal that is still being
investigated by the SEC (see
The risk of inflated manager fees is heightened if a
pension, such as Kentucky, does not solicit competitive bids
from investment managers, according to Siedle.
It is a seemingly logical conclusion, but in light of the
ban of placement agents going forward, is this 'politicisation'
of mandates a real or imagined concern? It might be that hedge
fund consultants or advisors forming strong ties with public
pension boards across the US should stay out of local politics.
Seeing what historically has played out, ensuring transparent
and fair business practices will be the key to lowering a
lingering 'corruption' fee that trustees can't afford if they
want to meet their obligations.