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June 29, 2015

calpers!

I have unfortunately specific enthusiasms when it comes to the news stories that I choose to follow, and one of my favorites is back on the front page! Well, page three. Of the business section.

So this story broke earlier this month:

For years, the California Public Employees' Retirement System, the country's biggest state pension fund, paid Wall Street billions of dollars to help finance the retirement plans of teachers, firefighters, police and other state employees.

Now Calpers, which has just more than $300 billion of assets under management, plans to cut back drastically on those fees by severing its ties with half of the external investment managers of its funds, according to Ted Eliopoulos, the chief investment officer.

This is important for this reason: pension funds, and Calpers is a big one in dollar amount and in reputation, are a very reliable source of capital for your basic financial services industry players — the hedge funds, venture capital, private equity, etc. Pension funds have billions and billions of dollars just sitting around, and the managers try to manipulate the different ways you can apply money sitting around, interest-bearing accounts, stocks and bonds, index funds, etc., in such away that the pension funds is hopefully earning scads of money, or at least outperforming inflation.

Hedge funds love this, as pension funds are as close to a fish in a barrel as you can get. And the hedge funds get paid not only in the form of a management fee (a set annual percentage of the fund), but also in the form of a performance fee, a big old chunk of the net gains of the fund. The latter fee is also known as "the carry," as it is treating as carried interest by the IRS and taxed more favorably as a capital gain and not as income.

So, a couple weeks later, it is revealed that (from information from last April) that in the review of the management of Calpers funds, the fee structure of the third party managers hired by Calpers was a little less than transparent:

Earlier this year, a senior executive of the California Public Employees' Retirement System, the country's biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.

Wylie A. Tollette, the chief operating investment officer, told an investment committee in April that the fees Calpers paid to private equity firms were "not explicitly disclosed or accounted for. We can't track it today."

If you read the story, you see that investigators are on the case, which is what it is, depending on your faith in such efforts, but the important aspect of this is, for those of you that are not weirdly fascinated with pension funds, is that the hedge funds, PE firms, etc. have a rapacious need for dumb money for the myriad ways they have devised to subject such dumb money to dedicatedly opaque fees. And, this dumb money — and not to say that pension funds, in this example, are actually dumb but rather duped by fast-talking Wall Street types — is basically helpless when it comes to monitoring the arrays of fees charged by the financial services actors.

It's a tiny little story buried in the business section, but just with Calpers alone, we're talking about billions not millions that may or may not have been paid as fees spuriously linked to performance. And the financial services industry is banking on the fact that stories like this will fly under the radar.

Posted by mrbrent at 10:38 AM