Category Archives: Investment management

CalPERS Board Discussion of Fees Exposes Naivete, Misguided Aim of Fee Reduction Effort

Today, the Financial Times has a prominent article on how the giant public pension fund and private equity investing heavyweight CalPERS has a new push on to reduce the fees that it pays to private equity firms.

This would all be salutary, except that a board meeting in December exposed that CalPERS’s staff has an unduly narrow conceptualization of the charges that private equity firms are taking out of the companies that they buy with the funds of limited partners like CalPERS. As a result, this effort demonstrates how badly captured the limited partners like CalPERS are. They passively accept the parameters set by the general partners and ask for concessions only within that framework, rather than demanding entirely new arrangements in light of well-publicized abuses and gaping shortcomings in transparency and accountability.

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Michael Hudson: The War on Pensions – The US Budget Anti-Pension Law

On the Senate’s last day in session in December, it approved the government’s $1.1 trillion budget for coming fiscal year.

Few people realize how radical the new U.S. budget law was. Budget laws are supposed to decide simply what to fund and what to cut. A budget is not supposed to make new law, or to rewrite the law. But that is what happened, and it was radical.

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Blowback from Oil Price War: Sovereign Wealth Funds Selling Investments

While there has been ample discussion the impact of falling oil prices on the national budgets of major oil producing nations, there’s been less media focus on how some of the countries that face budget squeezes are likely to react.

Consider what a difference nine days makes. Moody’s gave six Middle Eastern countries a thumbs up on December 8, based on the assumption that oil prices will average $80 to $85 a barrel in 2015. With WTI now at $55.33, it appears reasonable to assume a price of $60 or below for the first half of 2015. The consensus is that production cuts will lead to much firmer prices in the final two quarters,* but $70 a barrel would now seem a more reasonable forecast for the year.

Here is the money part of the Moody’s assessment (emphasis ours):

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Wolf Richter: Treasury Warns of Leveraged Loan Risk

Yves here. Wolf provides a detailed and informative account of a new report by the Office of Financial Research on the risk of leveraged loans. The big finding is they don’t like what they are seeing. And on top of that, part of their nervousness results from the fact that the ultimate holders of leveraged loans are typically part of the shadow banking system, such as ETFs, and thus beyond the reach of bank regulators.

Because these loans were issued at remarkably low interest rates, they aren’t a source of stress. But as their credit quality decays (recall quite a few were made in the energy sector) and/or interest rates rise (the Fed is making noises again), investors in mutual funds and ETFs will show mark to market losses that could well be hefty.  Any bank with large amounts of unsold inventory would also be exposed; query whether regulators will let them fudge by moving them to “hold to maturity” portfolios.

Oh, and what is the biggest source of leveraged loans? Private equity funds when they acquire or add more gearing to portfolio companies.

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Transparency Hypocrite BlackRock Doesn’t Believe in Giving Out Info But Likes to Take It

Reader Adrien pointed out an article from the Financial Times from last month, in which the world’s largest fund manager, BlackRock, stood up for the widespread practice in the UK of fund managers insisting that investors, including public pension funds, sign confidentiality agreements. This goes well beyond the objectionable practice in the US, where managers of exotic-seeming strategies like private equity, hedge funds, and infrastructure funds have managed to shroud their activities in secrecy. In the UK, even plain-vanilla fund management strategies, like stock and bond funds, are also subject to this information lockdown.

But as we’ll demonstrate, BlackRock does not walk its talk.

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Hedge Fund Investors Starting to Push Back Against Big Fees for No Performance

Bloomberg reported on Wednesday that hedge fund investors are finally getting serious about reining in hefty fees when investment performance is underwhelming, particularly since that has been the case for the industry as a whole in recent years. But regular readers of this blog can tell how serious this initiative really is from the very first paragraph of the article:

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Meet and Greet Natalie Jaresko, US Government Employee, Ukraine Finance Minister

The new finance minister of Ukraine, Natalie Jaresko, may have replaced her US citizenship with Ukrainian at the start of this week, but her employer continued to be the US Government, long after she claims she left the State Department. US court and other records reveal that Jaresko has been the co-owner of a management company and Ukrainian investment funds registered in the state of Delaware, dependent for her salary and for investment funds on a $150 million grant from the US Agency for International Development. The US records reveal that according to Jaresko’s former husband, she is culpable in financial misconduct.

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Hedge Funds Closing At High Rates

CalPERS’ decision earlier this year to exit all hedge fund investments turns out to have been a particularly visible manifestation of a trend underway: that of investor dissatisfaction with hedge funds. CalPERS politely attributed its withdrawal to excessive fees, too much complexity, and the difficulty of finding funds where it could put a meaningful amount of money to work. The latter point gets at the real problem: hedge funds have underperformed and investors are less and less willing to pay big fees for lousy results.

A Bloomberg story revealed that a marked uptick in the number of hedge funds closures this year.

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Private Equity Titan Blackstone Admits New Normal of Lousy Returns, Proposes Changes to Preserve Its Profits

Private equity continues to make headlines, and not in a good way, despite industry efforts to spin otherwise. The latest shoe to drop is that private equity firms are trying to rewrite some well-established fund terms to allow them to continue to rake in egregious profits even as the returns of most funds have underperformed the stock market.

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Treasury Liquidity Freakout: Searching for a Market-Maker

As someone old enough to have done finance in the Paleolithic pre-personal computer era (yes, I did financial analysis using a calculator and green accountant’s ledger paper as a newbie associate at Goldman), investor expectations that market liquidity should ever and always be there seem bizarre, as well as ahistorical. Yet over the past month or two, there has been an unseemly amount of hand-wringing about liquidity in the bond market, both corporate bonds, and today, in a Financial Times story we’ll use as a point of departure, Treasuries.

These concerns appear to be prompted by worries about what happens if (as in when) bond investors get freaked out by the Fed finally signaling it is really, no really, now serious about tightening and many rush for the exits at once. The taper tantrum of summer 2013 was a not-pretty early warning and the central bank quickly lost nerve. The worry is that there might be other complicating events, like geopolitical concerns, that will impede the Fed’s efforts at soothing rattled nerves, or worse, that the bond market will gap down before the Fed can intercede (as if investors have a right to orderly price moves!).

Let’s provide some context to make sense of these pleas for ever-on liquidity.

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Private Equity Now Looking to Even Bigger Chumps, Namely 401 (k)s and Retail

One of the reasons that private equity has managed to flourish is that its biggest investor group is what is traditionally referred to as dumb money: public pension funds, which account for 25% of industry assets. Readers may recall that even CalPERS, widely considered to be the savviest public pension fund, recently had a public board meeting where the questions asked of prospective gatekeepers, the pension fund consultants, were, with one exception, softballs. And that question was the only one to address the SEC’s revelation that private equity firms have been engaging in large scale fee-skimming and other forms of grifting. And remember, the SEC also stated that the investors in these funds, known in industry nomenclature as limited partners, have done a crappy job of negotiating their agreements.

But in predictable fashion, as one group of marks, um, sales targets, starts to dry up, private equity funds, aka general partners, are hunting for new ones. And having gone very systematically after every conceivable large pot of money, the only place left for them to go is down market, in terms of size and sophistication.

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State Street, Governor Elect Rauner Both Implicated in Pay-to-Play Scandals

The more rocks you turn over in public pension land, the more creepy crawlies you find. No wonder private equity has such a secrecy fetish. The most obvious, and most offensive to the public, are so-called pay-to-play scandals, in which public officials who are in a position to influence how funds are invested, take campaign funding from individuals or firms who are currently managing government funds or in short order get a mandate.

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SEC Commissioner Kara Stein Fighting for Tougher Bank Sanctions, Stymies Bank of America Settlement

One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.

SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It’s unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It’s virtually never done to have a commissioner from the same party buck the chairman.

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