New York magazine reports that activists are succeeding in persuading public pension funds to drop out of hedge fund investments.
The pension fund trustees have included that these investments are a bad risk. Their decision making was influenced by an activist group called the Hedge Clippers, which was created by the AFT to embarrass the hedge fund managers.
Part of the anger towards the hedge funds results from their heavy investment in Puerto Rico bonds and their public relations campaign to stop Congress from allowing Puerto Rico to get bankruptcy protection. Certain hedge funds bought Puerto Rico’s bonds at a deep discount and now hope to make billions by getting paid in full. They have been running slick commercials on television featuring a Puerto Rican woman who says she will lose her life savings if Congress allows Puerto Rico to find a solution other than paying the bondholders in full.
Paying the bondholders in full will mean bankrupting the Puerto Rican economy, closing its schools and social services, but paying the hedge funds the face value of the bonds they bought at a deep discount.
Just five days before New Yorkers went to the polls in bitterly contested presidential primaries defined by the widespread sense among voters that Wall Street is indeed “rigged,” the New York City Employees’ Retirement System, or NYCERS, where Garrido is a trustee, voted to pull its money out of all hedge funds. That amounts to about $1.5 billion, or 3 percent, of a $50 billion pension fund.
The perception that hedge funds are a raw deal for everyone but their fee-fattened managers has not only become mainstream with astonishing speed, it has begun to pose a threat to an industry that pretty recently seemed to be on top of the world. The move by the pension for the largest municipal employees union in the U.S., representing 100,000 New Yorkers, to get out of hedge funds is the latest sign that the near $3 trillion hedge-fund industry has peaked, with global assets now slightly lower than they were in 2014, as investor redemptions hit $15 billion after last year’s poor performance. NYCERS was following the lead of another bellwether entity, the $300 billion California Public Employees Retirement System, which exited hedge funds more than a year ago.
But NYCERS pulling its money out of hedge funds is perhaps best read as the biggest victory yet for a burgeoning anti-hedge-fund movement that is fueled by widespread anger at economic inequality and argues for divestment on a wide variety of grounds — most notably right now that prominent hedge funds are squeezing Puerto Rico for debt payments, even as the island spirals deeper into economic depression. At the forefront of that protest effort is a group called Hedge Clippers. About a year ago, the American Federation of Teachers created the organization in response to anti-union efforts and other conservative political actions by various hedge-fund titans. For months the group has been lobbying public pension funds — including NYCERS — to get out of the investment vehicles. Last November, Hedge Clippers published an AFT report showing that 11 big public pension funds that have invested in hedge funds would have done better elsewhere. New York City public advocate Tish James, a NYCERS trustee, gives some credit to Hedge Clippers for the decision to divest. The group’s arguments reached “the minds of a number of individuals who want to be conscious about our public investments,” she says, and likens its efforts to the 1980s campaign to pull money out of apartheid South Africa.
Following on the heels of New York’s move, Hedge Clippers met with Ohio public-pension-fund execs to make its case, and it plans to take its battle to college campuses next, where it hopes to win over liberal-leaning universities, which have invested a huge chunk of their endowments in hedge funds, including those run by the moguls who are their alumni. “We feel confident that more pension funds are going to divest,” says Stephen Lerner, a former organizer with the Service Employees International Union and one of the key architects of Hedge Clippers.
This all comes at a time when many hedge funds have experienced their worst year since the crash of 2008, following a string of disappointing ones. Last spring, New York City Comptroller Scott Stringer (also a NYCERS trustee) released the devastating report that made Garrido so angry: He found that private equity, real-estate, and hedge-fund assets had cost the city’s pension system $2.6 billion in lost value over the prior ten years, in large part due to the hefty fees they charged. Then, in 2015, NYCERS’s hedge-fund portfolio lost 1.88 percent, lagging behind both the S&P 500 and key bond indexes.
The explosive growth of hedge funds — they had one-sixth as much money under management at the turn of the century as they do today — was fueled in no small part by public pensions like NYCERS handing them huge sums of money. Those billions helped transform what previously had been a boutique investment for the Über-rich into an institutional asset class where management fees of 2 percent of the money under management and 20 percent of the investment returns created a slew of hedge-fund billionaires. Even in years their funds lost money or barely broke even, some managers earned hundreds of millions off management fees alone. Castles sprouted up on the Connecticut shore. World-class art collections were assembled. Historic fortunes were made.
Financed largely by the AFT and a few philanthropic foundations, Hedge Clippers has quickly morphed into a coalition of more than a dozen labor, civil-rights, environmental, and progressive community groups expanding to ten states and Puerto Rico with a stated mission of “unmasking the dark money schemes and strategies that the billionaire elite uses to expand their wealth, consolidate power and obscure accountability for their misdeeds.” The group’s top dozen organizers work out of the offices of their respective organizations, primarily in Washington, D.C. and New York, mobilizing through a Google listserv. The group protests a variety of issues, some more comprehensible than others: They interrupted investment conferences in New York City, alternately demanding Starboard Value’s Jeff Smith institute a $15-per-hour minimum wage for his fast-food workers at the Olive Garden and blaming Larry Robbins of Glenview Capital for causing cancer by investing in Monsanto. Still, the group knows it’s riding the zeitgeist.
To some extent, the anti-hedge fund movement has its roots in Occupy Wall Street. Lerner, who has been a leading labor political strategist for decades and is now a fellow at Georgetown University, was also involved in that movement. He says the new, laserlike focus on hedge funds grew from seeing billionaires like GOP donors Paul Singer and Dan Loeb battle unions on public education and taxes. When Hedge Clippers shone a light on investments by billionaires Julian Robertson and Steve Cohen in drug company Gilead, which has priced a hepatitis-C-virus drug out of reach for many, that brought AIDS activists and civil-rights groups into the anti-hedge-fund cause.
In New York state, the anti-hedge-fund activists have also hooked up with a group called “Patriotic Millionaires” — which includes some hedge-fund and private-equity managers — in an effort to kill a tax break that allows these managers to pay a lower tax rate on income they earn from managing other people’s money. A bill to abolish the so-called “carried interest” loophole is currently working its way through the New York Senate.
To be sure, hedge funds aren’t going away. The biggest fund, $104 billion Westport, Connecticut–based Bridgewater Associates, which runs an opaque black-box strategy, grew 16 percent last year despite lackluster returns, according to a recent survey by data provider Hedge Fund Intelligence. Funds that are $5 billion or greater in size continue to dominate the industry, and those tend to have fee structures that allow them to survive sizeable redemptions. Moreover, the decade-long boom has made it possible for many hedge-fund billionaires to keep the doors open with just their own wealth if it comes down to that.
But the industry can’t ignore the winds of change. “The pressure on institutional investors to reduce, or abandon, their exposure to hedge funds is growing,” placing the industry at a “tipping point,” says HFI managing editor Nick Evans. Hedge funds will have to deliver results for investors that are not achievable elsewhere to justify their high fees, he says. Between 1990 and 2000, hedge funds had average annualized returns of almost 20 percent, but those days are long gone. “Out of maybe 10,000 hedge funds, only 1 percent are worth their fees on a net basis,” says Michael Hennessy, managing director of Morgan Creek Capital Management, which invests in hedge funds. “There are a lot who are not worthy and should go away.”
To survive, hedge funds will also have to confront the new political reality that has taken hold, as their politics and their investments become more closely scrutinized, thanks in no small part to Hedge Clippers. Nowhere is this clearer than in the case of NYCERS, whose divestment was partly motivated by its hedge funds’ role in the Puerto Rican debt disaster that is still unfolding. Last year, the pension fund learned that at least three of the hedge funds in its portfolio (D.E. Shaw, Brigade Capital Management, and Fir Tree Partners) were among the many that own about 30 percent of Puerto Rico’s outstanding debt. Hedge funds bought into a $3.5 billion junk bond offering in 2014 and swooped in to buy more as prices sank last year.
When Puerto Rico said it might default on its $72 billion debt last summer, Hedge Clippers hammered on the hedge fund connection and staged a protest in front of the office of one of the biggest hedge-fund owners of the debt, BlueMountain Capital. The crisis hit home for the NYCERS retirees as hedge funds pushed Puerto Rico to cut public services and lay off government workers to avoid default. Thousands of those workers are members of AFSCME (American Federation of State, County and Municipal Employees) — the same union that represents NYCERS retirees.
Puerto Rico, now facing a 45 percent unemployment rate, has since devolved into a humanitarian crisis, with power outages and shuttered hospitals as the Island Commonwealth has been unable to push bankruptcy legislation or debt relief through the U.S. Congress. Instead, the bondholders have launched a massive lobbying and advertising campaign accusing Puerto Rico of profligacy and demanding it pay up. The developments nudged NYCERS toward pulling its money. “A significant number of NYCERS retirees are Puerto Rican, and if they were to know we were investing in hedge funds that had a [negative] financial impact on Puerto Rico, they would support the divesting from those hedge funds,” says Tish James.
Last November NYCERS appealed to the hedge funds to help solve the Puerto Rican crisis. When that failed, trustee Garrido — who had previously complained that hedge funds’ high fees combined with lousy returns were a “rigged system” — went on the attack at a December 3 press conference on Capitol Hill. As Latino political activists pressed Congress for help, he criticized hedge funds for profiting from the economic crisis while demanding austerity policies that hurt the island’s working class. Four months later, NYCERS voted to dump its hedge-fund investments.
NYCERS wouldn’t be pulling out of hedge funds if it had been getting the returns it hoped for. It wasn’t getting those returns, and that’s the dark side of this news, because it needed those returns.
The dark side of this news is that the main reason t
Without doubt, public pension funds should never be invested in gambling…and hedge funds are pure gambles. In determining the pensions for public workers like teachers and professors, fire fighters, hospital workers (who are all covered by CalPERS) safety must be the rule.
‘Puts and calls’ are not even a good idea for the most sophisticated investors unless they are so rich that they can afford the risk.
They bet on human loss.
There is a reason they are called vulture capitalists.
Does anybody have any info on TIAA-CREF?
You can read about the travesty of the non-profit TIAA-CREF’s management at the website, TIAA-CREF Consumerism. Over the past 2-3 years, I have posted numerous ways in which they have ethically failed their members. The Oakland Institute has a scathing report about the firm’s investments. The TIAA Institute published a report co-authored with the Arnold Foundation, which was “unceremoniously pulled” after Francis Denmark, a business writer and Truthout, called out TIAA on it. A TIAA-CREF V-P visited state capitols, advocating for hybrid retirement plans, to replace defined benefit plans. An insider described it as rogue behavior. Yeah right.The company’s record on voting in favor of corporate disclosure/transparency, by virtue of the shares they own, is abysmal despite their rhetoric otherwise. Recently, TIAA quickly settled a suit brought by private college faculty. The company was part of the 60 Minutes expose April 24. Based on internal press, they are very cozy with hedge funder Pete Peterson, who has spent $500 million to take down Social Security. The company’s even been fined by FINRA (which struck people in the field as highly unusual). The President of the David Koch Theater is on the Board, or, IMO, coffee klatch.
You can form your own opinion about the TIAA-CREF political spending which is shown at the Sunlight Foundation.
The wife of TIAA-CREF’s CEO, Roger Ferguson, is part of the SEC revolving door. Ferguson was described as Wall Street’s fantasy to head the Federal Reserve. If he’s ever chosen for the job, expect accelerated concentration of wealth by the richest 0.1%.
Thanks for all this important info, Linda. Years back, when my husband was offered a Golden Handshake as Chair of the English Dept., his university suggested TIAA-CREF to us. We listened to their pitch and fled, just based on the hyperbole. Lo and behold, a good decision. CalPERS…good, so far.
I can tell you that they certainly are acting like a “for profit” organization these days. They have instituted tiers about a year ago. If your employer is large and has many employees in TIAA Cref, there is little cost to oversee retirement accounts. But if you are in the lower tiers… they now charge a fee (not dependent upon how many years you have been with them but how big your employer is). Makes me want to put money under the mattress!
According to the NLRB, public university employees can be kept in the dark about how much their employer, the universities, charge for the retirement “Plan Administrator Fee”. And, while TIAA-CREF should be aligned with their investors’ interests, who are the employees that own the accounts, TIAA-CREF refused to disclose the information, also.
Thanks. So in particular, one cannot tell the employer (in this, the state of Tennessee) to send their contribution to my retirement to somewhere else? (Not that I knew anything else.)
Mate,
If the account is annuitized, the experiences of people trying to move the money, is described by them, at the TIAA Consumerism website.
Thanks for posting this. I was in Puerto Rico, a couple of weeks ago. One of the people we spoke with, was very concerned about the parasites from Wall Street bankrupting P.R., an American territory. He described them as predator-type colonialists. I told him the American people are also a colony, of the multinational corporations. It’s good to see Americans standing up against evil.
Now, the state of Washington should stop dishonoring America’s revolutionary, who fought against aristocratic rule. They should change their status to a colony of the richest 0.1%.
Thanks Linda for the depressing info. My univ contributes 10% to TIAA-CREF for my retirement. I never thought about it until now. The only thing I did was put all money into what they call “Socially conscious investment fund”. I doubt this retirement contribution can be asked to be deposited anywhere else. Is there a anything like a “good” retirement fund?
The only time I was suspicious of tiaa-cref when at the time of the big crash due to the internet bubble, my money dropped to 40% of its original amount in one week. I was surprised since they stated, they don’t invest into volatile funds like internet companies.
For a number of years, many universities only gave employees, one choice, TIAA-CREF. As long as the company matched its motto about serving the greater good, it was o.k. The company had the return advantage of not having to pay stockholders, which gave it, at least, a 2% edge. (But then, management changed and, IMO, the firm began to act like other Wall Street firms.)
A guy wrote a book a few years ago, describing his advice about university employees choosing TIAA-CREF, vs. other investment company choices that universities offer. I don’t recall the book’s name but, it’s on the internet.
After retirement, the faculty that I know, who were in TIAA-CREF and not annuitized, took their money out of the firm. Those who didn’t want to use the money to buy low fee indexes (usually recommended) and, instead wanted to own stocks, but not have responsibility of portfolio management, selected local financial firms, that had registration requiring fiduciary obligation. The investors pay a transparent 1% fee. The stocks are owned by the individual through an account like T.D. Ameritrade, which the financial firm can only use to do trades, not withdraw from (avoids the Madoff risks).
Linda, Thanks for the detail on TIAA-CREF. Love the activitist’s identity as Hedge Clippers.
One of the CREF board members is NBER’s president. Original funding sources for NBER are in a report at Sourcewatch.
NBER publishes working papers that haven’t been peer reviewed. IMO, if they serve the interests of the rich, the research may move into policy very quickly. Reportedly, the disastrous economic austerity policy that Europe implemented, used as the basis for the policy, the claims presented in Harvard’s Rogoff Rhinehart’s NBER paper. Subsequently, after the policy destroyed working people’s lives, flaws in the analysis were found. I think some of the Chetty work is in the form of a NBER working paper.
The afore mentioned CREF Board member was the faculty advisor, at MIT, to an economist who visited state capitols, testifying about some generalized, alarmist pension stuff. The criticism of the economist’s work product, was the most damning I’ve ever seen leveled at an academician. He moved on to SIEPR, which some people describe as the Stanford Institute for the Evisceration of People’s Retirement.
I love John Oliver of the Last Week Tonight show. He’s the new Jon Stewart. Pearson and high stakes testing took a serious downturn when Oliver did his Standardized Testing episode. Now, he just did an episode called Puerto Rico about hedge fund managers, and look at the glorious results regarding public opinion! Strike while the iron is hot, all.
Thanks! Tomorrow will be the first anniversary of the Oliver piece
It’s as relevant as then: my daughter will take the TNReady (state test), EOC AP tests supposedly this week, but no idea when and which.
Hopefully, private equity firms will be the next to be dropped, since they’re even more parasitic than hedge funds…
Agreed. Cleaning up the hedge funds and private equity is long, long overdue. The fact that they’re still so involved with derivatives is scary (but not surprising, I guess). This is like playing a game of chicken with the economy. I can’t believe that institutional investors and
municipalities are still investing in hedge funds—oughta be illegal right now.
It goes without saying that in the process of finding “bad companies” to kill off, a top criteria for such company would be “lots of overhead.” (Overhead would be of course employees and their benefits.)
No wonder we’ve had a “jobless recovery” since 2008. Jobs are the enemy if you are a hedge fund.
David Dayen has a great article in May 2, 2016 American Prospect about the workings of hedge funds.
http://prospect.org/article/what-good-are-hedge-funds
The Obama Administration issues another glowing endorsement of all charter schools:
https://www.whitehouse.gov/the-press-office/2016/04/29/presidential-proclamation-national-charter-schools-week-2016
It is stunning how far in the tank DC is for these schools. Complete and utter capture.
Read that statement, that unqualified endorsement of all charter schools, and imagine anyone in ed reform making a blanket statement like that regarding public schools. It would never happen. In fact,it’s difficult to find ANY positive statement on ANY public school, ever.
That the President and his appointees continue to claim they are “agnostics” is ludicrous. They’re insulting our intelligence with this claim. They obviously both prefer and promote charter schools over public schools and they’ve made that clear as day for his entire tenure.
Someone should tell the President what he says isn’t true- all charter schools aren’t better than all public schools. He’s wrong.
One can make this comparison all across ed reform. It isn’t just the Obama Administration.
Here’s EduPost:
https://twitter.com/edu_post
It’s negative story after negative story on public schools and then endless cheerleading for charters. The spin is just so blatant, so clumsy and obvious and heavy-handed- that you wonder if they’re so far in the tank they don’t see it themselves.
You can SEARCH ed reform sites for a positive story on public schools. You won’t find one. It’s blatant propaganda and it’s now an integral part of the US Department of Ed. They’re no longer credible on public schools.
Not just Obama, Ohio’s raspy Senator Brown and plastic-looking Sen. Portman, too.
More mindless rah-rah for charter schools:
http://njleftbehind.blogspot.com/2016/05/qodentrenched-interests-seem-more.html
All charter schools are better than all public schools, say “the agnostics” and anyone who says different is an “entrenched interest”.
It’s an echo chamber, which would be okay if it were just paid lobbyists but it’s all of government too!
I don’t know- what you do with this level of capture, when it’s so total? It seems hopeless to me, like there’s no possibility of any dissent, ever.
Teachers and other public employees should be contacting their pension funds to indicate that they want out of hedge funds.
Rhode Island’s situation is among the worst b/c its governor is IMO, hedge fund sleaze. (Matt Taibbi in Rolling Stone, “Looting the Pensions”)
Of course, Kasich worked for Lehman Bros. So, we’ll call it a tie.
I believe we’ll want to give core credit to Yves Smith, aka Susan Webber, of the Naked Capitalism blog, for hammering on hedge fund rip offs within pension plans since 2007 or so, focusing directly on CalPERS. She has also been following the privatization of American public education and from time to time she cross posts education articles.
Thanks for the heads up reminder about Naked Capitalism. Agree, it’s an excellent source of information.