Kentucky Investment in Blackstone Fund Shows Desperation/Cluelessness of Some Public Pension Funds

[TexasTowelie]

One of the easiest types of investors for Wall Street sharpies to fleece are public pension funds that have a large shortfall they are desperate to make up. Even seasoned traders can all too easily start putting on desperate wagers to try to earn their way out of a hole, or worse, cook the books and try to make the trading profits later. Public pension funds as a groups aren’t terribly savvy; even though the California giant CalPERS has been stonewalling us on disclosure, it’s generally seen as competent, which puts it way ahead of most of its peers.

As a new article by David Sirota in Pando Daily shows, by contrast, the Kentucky Retirement System, which manages $14.5 billion, is an obvious lamb led to slaughter. Sirota’s source is Chris Tobe, an SEC whistleblower, former trustee of KRS, and author of Kentucky Fried Pensions, a book about the sorry condition of the Kentucky pension system.

KRS is one of the most severely underfunded retirement systems in the United States, with only 23% of its liabilities funded. As a result, the pension fund is up to its eyeballs in a “reaching for return” investment strategy, which means it has gone full bore into “alternative investments,” a fancy name for high risk, high return, and somewhat to very illiquid strategies like hedge funds, private equity funds, and real estate funds. Kentucky has a whopping 34% of its total funds invested in alternative investments versus the average across the pension fund industry of 22%. That allocation has increased from a mere 7% 12 years ago. More and more experts are starting to question this enthusiasm. As Sirota writes:

For instance, citing data from Wilshire Consulting, conservative conservative American Enterprise Institute scholar Andrew Biggs says these kinds of dangers make alternatives “60% riskier than U.S. stocks and more than five times riskier than bonds.” Time Magazine’s Rana Foroohar reports that a recent conference of liberal scholars said the possibility of catastrophic losses mean “pension funds shouldn’t be in high-risk assets” and “should be mainly invested only in no or low fee index funds.” And both the Government Accountability Office and Siedle have raised questions about the risks inherent in private equity’s opacity and illiquidity.

Alternative investments carry much higher fees than buying stocks and bonds. Private equity and hedge funds are famed for their commonly touted 2% annual management fee and 20% upside fee, although there is a good deal of variability around these norms. For instance, very large private equity funds sport lower management fees; some hedge and private equity funds, like Bain, demand and get eyepopping 30% upside fees.

More at http://www.nakedcapitalism.com/2014/05/kentucky-investment-blackstone-fund-funds-shows-desperation-cluelessness-public-pension-funds.html .

[Wellstone ruled]

1. But But,

just think of the commissions paid to the decision makers in Kentucky. Never made inflation on any investment with any Blackstone entity. That is why you have to question your financial advisory,or as we did,fired his sorry ass and educated ourselves and never looked back. Read the fine print. These suckers are mostly crooks and liars.

[TexasTowelie]

2. The best financial advisor to take care of your money

is yourself.

I'm willing to take advice and learn, but never trusted anyone else to take care of my finances. I saw an opportunity back in 2004 when I could foresee that the real estate market was over-inflated and invested in some company stock because they stood to profit in the derivatives market when the crash occurred. When I sold the stock in 2008 I realized an annual return of 30% for each of those years.

[A Little Weird]

3. This should be criminal

One of the reasons I took a job with the state was for the pension benefit. Now I'm wondering if it will even be there when it's time for me to retire.

The legislators have screwed over the public employees by underfunding the pensions for years but their own pensions are in a different system which is fully funded.