Drudge Retort: The Other Side of the News
Sunday, December 31, 2017

Years of risky hedge fund investments helped plunge Kentucky's public pension system billions of dollars into the red, making it one of the worst-funded state pension systems in the country. Now, eight current and former state employees are suing a trio of hedge fund operators and current and former members of Kentucky's pension board, alleging that they breached their financial duties to the state and its taxpayers by sinking millions of dollars into "exotic" hedge fund bets. ... Together, the defendants "chose to cover up the true extent" of the pension plans' financial shortfalls and to "take longshot imprudent risks" in an effort to make up for the funding problems, the suit contends.

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Stories like this should compel supporters of traditional pension plans to rethink their position. Safe? Reliable? Less risky than a 401-K? Hardly. In fact the opposite.

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There are a lot of layers in pension plans such as the one highlighted in this story. And included in these layers are hedge fund managers.

How in the world did a state pension plan agree to allow funds to be invested into hedge funds?

#1 | Posted by eberly at 2017-12-29 09:17 AM | Reply | Newsworthy 1

FTA

"But over the ensuing decade, it lost more than $6 billion in assets. Today, it holds enough cash to cover just 37 percent of its obligations. The largest of the state's plans, the Kentucky Employee Retirement System, has enough in assets to pay only 17 percent of its future obligations. The system as a whole is facing a nearly $27 billion shortfall, according to official figures. The lawsuit estimates the actual funding gap could be as large as $50 billion"

A pension doesn't represent much of an "obligation" if this happens.

#2 | Posted by eberly at 2017-12-29 09:19 AM | Reply

How in the world did a state pension plan agree to allow funds to be invested into hedge funds?
#1 | POSTED BY EBERLY

My guesses are kickbacks or cronyism.

#3 | Posted by TFDNihilist at 2017-12-29 09:40 AM | Reply

no doubt. Which should subject these folks being sued to criminal as well as civil penalties.

#4 | Posted by eberly at 2017-12-29 10:36 AM | Reply

I don't have an objection to capital punishment when you lose $50 billion of a pension fund.

#5 | Posted by bored at 2017-12-29 01:00 PM | Reply

#5

It helps if you read the article before commenting...

The fund lost $6 Billion over the past decade, the underfunded commitment "could be as large as $50 billion."

RIF

#6 | Posted by Rightocenter at 2017-12-29 01:13 PM | Reply

1st......Lets get a sports writer from huff post to write an article about 'alternative investing' of which he has absolutely no expertise/knowledge.

Then let's see him ramble on and try to make some points of outrage.

Then conclude with some sanctimonious POV indicating how intelligent the author (and the readers are) is for discovering this 'scam' of KTY pension accounts.

#7 | Posted by DavetheWave at 2017-12-30 08:20 AM | Reply | Funny: 2

Hey travis waldron. Do you know what alternate investments are and why pension plans seek them out?

Travis....what are uncorrelated returns?

Travis have you ever heard of KKR, Blackstone, and PAM?

Travis do you know what an accredited investor is? Do you know how accredited investors are bound to be responsible for their own due diligence??

So now somebody is upset they didn't have better 'returns' .Oh boo hoo time sue somebody for the poor decisions made by their pensions boards investment committee.

I feel sorry for people who get duped into thinking a SPORTS writer can comment on financial maters. But hey he comes from think progress so he's bound to get strong support here!!

#8 | Posted by DavetheWave at 2017-12-30 08:28 AM | Reply | Funny: 2 | Newsworthy 2

#8.

I feel sorry for any poor schmuck who has to live in Kentucky.

#9 | Posted by Zed at 2017-12-30 08:41 AM | Reply

9 Obviously you have ZERO knowledge about pension investments, so resort to glib statements, pretending to have keen insight into their worlds!!

And what do you think QE 1,2, and 3 did for pension funds and retirees?

#10 | Posted by DavetheWave at 2017-12-30 10:02 AM | Reply | Funny: 1

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How in the world did a state pension plan agree to allow funds to be invested into hedge funds?

My guess is the word "fiduciary" is absent from relevant Kentucky regulations.

Or, they hired DaveTheWave.

#11 | Posted by snoofy at 2017-12-30 11:09 AM | Reply | Newsworthy 2

-I feel sorry for any poor schmuck who has to live in Kentucky.

where should they move to?

California? New York?

FTA...

"Investments in hedge funds of funds have created legal scandals for state pensions across the country, including in California and New York"

And there are countless examples of underfunded pensions for public employees all over the country. Not necessarily because of bad investment decisions but rather just a total lack of adequate funding.

#12 | Posted by eberly at 2017-12-30 11:24 AM | Reply

"Not necessarily because of bad investment decisions but rather just a total lack of adequate funding."

Starve The Beast.
It's you vote Republican.
For lower taxes.

When was the last time you voted Republican, anyway?

#13 | Posted by snoofy at 2017-12-30 12:51 PM | Reply

where should they move to?

#12 | Posted by eberly

Most of them are too poor to move, aren't they? Getting poorer by the year, apparently.

#14 | Posted by Zed at 2017-12-30 01:01 PM | Reply | Newsworthy 1

Many counties, states, cities, etc have underfunded their pensions. It's been a problem kicked down the road for decades.

Low interest rates have driven this coupled with an unwillingness to address it.

I'm not playing, snoofy. Go sniff someplace else.

#15 | Posted by eberly at 2017-12-30 01:02 PM | Reply

So when you said "poor" you meant poor....whatever.

I don't know where it's great to be poor. This thread is about pension beneficiaries getting screwed by negligent investors.

I know.....you and snoofy want to play "red states are bad"

Well....they are in many ways but blue and red states have horrible records on managing their pensions.

I'm glad I don't depend on one. My evil private employer and my 401-K......well, I trust that way more.

#16 | Posted by eberly at 2017-12-30 01:08 PM | Reply

11 which proves you too know nothing about pension fund investing. And fail at reading comprehension!!

I'd guess every pension fund in America has 'alternative investments'. It's a riot you don't know that, and comment as if you have some deep understanding. Like the author of article, a sports writer.

Keep it up this retort is hilarious!!!!

#17 | Posted by DavetheWave at 2017-12-30 01:21 PM | Reply | Funny: 2

Posted by DavetheWave

Idiot alert.

#18 | Posted by Angrydad at 2017-12-30 07:53 PM | Reply | Newsworthy 1

Idiot alert.

#18 | POSTED BY ANGRYDAD AT 2017-12-30 07:53 PM

Thanks for warning us of your arrival.

Dave is right, most Public Pension Plans invest in PE and Hedge Funds to make up for the low interest rates over the past decade, and those "bets" have failed to pay off.

Here is a chart of underfunded public pension plans by State, it should be terrifying for anyone who relies on a public pension:

State Pension Funds

#19 | Posted by Rightocenter at 2017-12-31 01:56 PM | Reply | Funny: 1 | Newsworthy 1

"Stories like this should compel supporters of traditional pension plans to rethink their position."

Eberly, why do you figure nobody ever says that about the Second Amendment?

I think I'll start adding that text as boilerplate to my "guns keep us safe" comment.

What I'm saying is, it's not the pension that's the problem, its the people in charge of operating it.

Right?

#20 | Posted by snoofy at 2017-12-31 02:28 PM | Reply

"I'm glad I don't depend on one. My evil private employer and my 401-K......well, I trust that way more.
#16 | POSTED BY EBERLY"

Right. That beast didn't get starved. Oops I mean "underfunded."

Maybe you'd like to explain why you think it's okay for the state to break it's promises to pensioners?

#21 | Posted by snoofy at 2017-12-31 02:37 PM | Reply

Promisin's one thing, payin's another.

--Mitchell Ryan as Dave Drake, High Plains Drifter

#22 | Posted by madscientist at 2017-12-31 03:42 PM | Reply | Newsworthy 1

Going to suggest something out there but why couldn't there be a semi-permanent QE that guarantees a minimum level of funding - say $30,000 per year. If funds out perform this level, revoke.

We essentially printed money out of thin air to help financial crisis ( and loaded up system with more risk - necessary IMO but not good political selling point) why not here?

I don't think it does any good to squeeze these people for resource they don't have. Many will end up on public assistance.

Good article and not limited to left/right "issues"

#23 | Posted by AfterMaff at 2017-12-31 04:00 PM | Reply

Oops I mean "underfunded."

Explain to us how a 401k can ever be "underfunded."

#24 | Posted by Rightocenter at 2017-12-31 04:12 PM | Reply

"Explain to us how a 401k can ever be "underfunded."

My comment was referring to under-funded pension plans.

A 401K without enough money for however long you end up living is, by definition, underfunded.

What age do you plan on living to?

#25 | Posted by snoofy at 2017-12-31 04:23 PM | Reply

Pew foundation reports that that most all pension funds use alternative investments. Do you guys even bother researching topics that you know nothing about??? EVIDENTLY NOT!!

www.pewtrusts.org

State and locally run retirement systems currently manage over $3.6 trillion in public pension fund investments, most of which are held by states. Broadly, half of these assets are invested in stocks; a quarter in bonds and cash; and another quarter in what are known as alternative investments, such as private equity, hedge funds, real estate, and commodities.

25% OF ALL PENSION INVESTMENTS are in alts. The Dr left proven yet again to not have the slightest idea of a topic they comment on with moral outrage!! And try to act holier than though elitists geniuses.

Keep it up, as I said, I'm dying from laughter at YOUR STUPIDITY

#26 | Posted by DavetheWave at 2017-12-31 05:46 PM | Reply

At 1 point Harvard was 100% alts.

#27 | Posted by DavetheWave at 2017-12-31 05:47 PM | Reply

"Broadly, half of these assets are invested in stocks; a quarter in bonds and cash"

75% in stocks and bonds is actually pretty un-diversified.

And I'd wager whatever hedge funds are in play have plenty of stocks and bonds as the underlying investments, even as they are wrapped up in options and derivatives.

#28 | Posted by snoofy at 2017-12-31 06:06 PM | Reply

"At 1 point Harvard was 100% alts."

That could actually be a balanced portfolio, since "hedge funds" can contain just about anything.

#29 | Posted by snoofy at 2017-12-31 06:07 PM | Reply

Man you're killing me. No Harvard was exactly opposite that and bragged repeatedly about their returns.

So, seeing how dishonest the Dr left is about admitting their ignorance, let's get to the heart of this. What sort of pension fund would allow years of underperfomance without changing managers?

Its their fiduciary obligation to conduct thorough due diligence. Evidently they failed. To blame their outside managers after the fact is comical. The plan itself is who should be sued.

Oh and to complain about the fees is ludicrous. They were stated contractually and were known to kty before during and after the contracts ran their course.

Oh and for the record I HATE hedge funds!!!

#30 | Posted by DavetheWave at 2017-12-31 06:22 PM | Reply

#19 | Posted by Rightocenter

Yes and there have been all sorts of pieces on how unprepared the pension plan managers are for investing in these areas. "Unsophisticated" is the word I have read time and again. They get taken time and again with Hedge Fund managers and such selling them on poor investments.

#31 | Posted by GalaxiePete at 2017-12-31 06:27 PM | Reply

31 bull crud. If they are unprepared and unsophisticated then they NEVER should be in their jobs. Admitting they are unprepared and or unsophisticated means they are not qualified for their positions. And the plan itself should be sued for their own breach of fiduciary obligations.

#32 | Posted by DavetheWave at 2017-12-31 07:31 PM | Reply

A 401K without enough money for however long you end up living is, by definition, underfunded.

No, that just means you are a ------ retirement planner, a 401K only contains the funds you put into it.

#33 | Posted by Rightocenter at 2017-12-31 07:51 PM | Reply

So Dave is sort of correct in that investing is a "buyer beware" proposition and hedge fund investing in particular places the onus of diligence on the investor, not on investment manager disclosures, but there are a couple of mitigating/complications factors here.

First, the issue of "accredited investors" The pension fund board is likely the only accredited investor here. The total assets in the plan they oversee is the qualifying measure allowing for an assumption of sophistication and resources Necessary to evaluate more exotic Investments. The problem here is that the pension participants almost certainly do not meet the qualifications of accredited investors individually. Treating accreditation as a "pass through" property of investor suitability is a gross lapse in the regulatory structure.

Second, the pension participants here ARE suing the pension board. If the board failed to do the diligence Dave correctly states is their responsibility then they have liability.

The participants here are also suing several of the hedge fund managers. The question of liability for the hedge fund managers could absolutely come down to the sales practices and representations made to the pension board. If the fund managers misrepresented the investments in question, if they described guarantees that didn't exists or promised returns that were not met, they don't get to hide behind "do your own diligence." Misrepresentation and abusive sales practices are still punishable even in the accredited investor space.

The suit apparently also cites the fees charged by the hedge funds and while fees were almost certainly disclosed in the offering, if return guarantees were made in the sales process that would have reduced the impact of those fees if met, then the fees themselves if not usual and customary then the fees themselves could potentially constitute a compounding deceptive practice and abuse.

On the state of pension funds in general, low interest rates have certainly hamstrung pension funds abilities to deliver relatively "safe" returns via long term bonds to meet their actuarial obligations. The lack of viable fixed income
Instruments available to meet Defined Benefit obligations has forced pension funds to seek other sources of return. Sometimes by holding significantly more traditional equities than they would have in a normal interest rate environment, but often by seeking out hedge funds that provide downside protection built around traditional and private equity portfolios. These protections are often the "Black box" in question and not necessarily disclosed or transparent at any meaningful level. They certainly don't disclose their risk management algorithms
In offering memorandums. If hedge fund managers misrepresent what their particular "black box" does under varied market conditions the investor, accredited or not does not have the resources to evaluate the risk return profile of the investment.

Lastly, participant longevity is the single largest contributor to unfounded pension liabilities, not mismanagement. You people live too goddamn long and generating the returns necessary to provide 30 years of retirement income requires significantly more risk than can be realistically guaranteed by any investment strategy. Pension fund boards are out in the position of needing magic beans to solve this problem. Hedge fund managers are selling these beans, some are doing so deceptively and misrepresenting what they sell.

#34 | Posted by leadbelly at 2017-12-31 10:37 PM | Reply

Mitch Mcconnell...can't he cover it? ...where is he on this?

#35 | Posted by ichiro at 2018-01-01 02:55 AM | Reply

"participant longevith' ... all you need to hear. it means hurry up and die.
arbeit macht frei.

#36 | Posted by ichiro at 2018-01-01 02:58 AM | Reply

#31,32,34

no, none of that. this is corruption. that's HOW it should be viewed.
the question is, why does this [virtually unregulated capitalism] STILL happen.
...start at the [top].

#37 | Posted by ichiro at 2018-01-01 03:05 AM | Reply

34..... The problem here is that the pension participants almost certainly do not meet the qualifications of accredited investors individually. Treating accreditation as a "pass through" property of investor suitability is a gross lapse in the regulatory structure.

Your info whether cut and pasted or not is mostly correct. But when you paste statements as wrong as the above sentences I just have to shake my head. 25% of the all American pension assets are in alts. The pension is obviously accredited by definition. To say the pensioners need to be is completely false. And so far from the truth as to discredit everything else you 5yped.

Oh and your comments on sales practices, come on kkr bx and Pam were not created yesterday. They know the rules. And these weren't firm based black boxes, they were funds of funds which is far different. You completely ignore that these were multi year durations and absolve the boards role of monitoring returns. They stayed with them, why? And who's fault is that. Crying after the fact is sour grapes, the old would have could gave should have.

Model asset allocation strategies were thrown on their heads after 2008 2009. Pension funds were decimated by a 8 to 10 year negative return in equities. And QE, bought to us by Obama, killed their fixed income multi decade future returns. In other words, it forced pensions to consider alts.
Its easy to say they should have been all s+p in 2010, but the boards were too scared to do so.

From what little I know of their portfolios, bonds have normally been their largest allocations

#38 | Posted by DavetheWave at 2018-01-01 07:41 AM | Reply

The system is rigged on many levels. One level is rich financial wizards enjoy political protection from prosecution. Buyer beware is meaningless for State employees and most 401K program savers, where performance consistently underperforms the DOW because of a myriad of hidden fees. Another level is hi-speed trading, controlled by a very small group located close to exchanges. This enables them to identify trends, however brief, and get in front of your trade and jack the price up or down depending on whether it is a buy or sell. Another level is brokers and the MSM lying their heads off to the public so elite insiders can profit take off people who believe what they hear. It doesn' matter if the pension board is liable if they don' have any money there is no practical recourse.

#39 | Posted by bayviking at 2018-01-01 08:08 AM | Reply

So now instead of addressing Kentucky and hedge fund returns, we are just bellyaching about the markets?

FYI Jack Bogle actually likes high speed trading and says it helps small investors. But what does he know?

News flask to BV if 'insiders' have been selling and retail buying, who's 'won' over the last decade?!! The top 10 tech firms in the world have amassed such large fortunes because they stayed long, not because of pump and dump schemes.

#40 | Posted by DavetheWave at 2018-01-01 08:27 AM | Reply

Dave, nothing above is cut and Pase. I have had a long career in financial services. I have worked extensively with a variety of private placements in my own investments and practice. It is my opinion that treating the accreditation as a "pass through" property of the DB Plan is a regulatory lapse. 401k's DO NOT pass through accreditation this way. I know why SEC treats them differently, but I strongly disagree with the rationale. Pension participants are by and large NOT sophisticated enough or wealthy enough to be accredited on their own. In my opinion, the boards should be limited in their investment selection to products which the individual participants would find suitable. That's just my opinion.

No where did I absolve the board's responsibility. I noted specifically that the investors are rightly suing the board. We had no disagreement on that point so there wasn't much more to say there.

They are ALSO suing specific fund managers. I added that there could be cause for a claim against the funds as well, potentially due to sales practices.

I've have personally been in meetings where such failures and misrepresentations from reputable and established firms have occurred and I have had to correct and call out improper language to protect my clients. Sometimes in these meetings especially where the diligence consultants already know all the fund managers they can talk right over the heads of the clients and or oversimplify things to the point where deceptive or misrepresentative statements get made. That consulting firm mentioned here is a big part of this failure in my opinion as it seems the board knew what they didn't know and hired a consultant to protect them. If they were misled, the consultant firm failed them as well.

Even without malice, these failures happens, even with good people. People get comfortable and casual and they speak in plain language that sometimes doesn't conform to the written disclosure. Those verbal statements can become cause for liability despite what was in the written disclosure as a deceptive/abusice sales practice failure.

#41 | Posted by leadbelly at 2018-01-01 09:53 AM | Reply

41

Thanks for that perspective, lead.

I can imagine, as in many instances, folks selected to sit on boards like this lack the financial sophistication to be of any value.

#42 | Posted by eberly at 2018-01-01 10:07 AM | Reply

"these failures".... What failures?!!

Hedge fund of funds have had supb market returns for years. Are you saying they sub preformed other fund of funds? Based on what?? Kkr and bx strongly disagree. They have good reputations as well as pacific life.

And I'd bet they did as well as or better then the pensions bond allocations.

The law suit looks like a kitchen sink of trial lawyers goobly ----, a load of baseless charges, with a few kernels of truth. Throw everything at them, especially completely irrelevant garbage, trying to distract and infuriate, while Hoping that some stick.

And suing the fund itself is another trial lawyer trick. It's an attempt to prove liability for the fund, so they can sue the investment companies. After all if the fund is liable to the pensioners, where's the money going to come from, the pension already is 100% owned by the pensioners.
Settlement monies would come from the same assets.

#43 | Posted by DavetheWave at 2018-01-01 12:37 PM | Reply

dave,

Calm down. I am saying that IF there were problems in the sales practices, that understand how such problems can occur even without nefarious intent. My only point in bringing up sales practices at all was to explain the the audience how a fund manager "could" have liability exposure here.

I have never uttered a single word here indicating that ANYONE is liable for unsatisfactory returns. Pension boards, consultants and fund managers are potentially liable for lots of things, such as adherence to process, communications and disclosure, but absolutely not liable for performance. If the suit amounts strictly to claims over performance, it will likely get tossed on pre trial motions.

Maybe you would be more comfortable if I approached the subject his way:

Unless there were issues with regard to disclosure or sales practices, then the fund managers will have no liability and the fault (if there is any) lies with the board and their consultant for diligence failures as you stated.

I'm just not assuming either way. If my posts sounded like I am assuming fault exists, that was poor communication on my part. I'm only exploring and explaining the issues that COULD result in liability and reasons a suit like this might show merit.

You do seem to be assuming the suit to be meritless. Do you have any specific information to support that assumption?

#44 | Posted by leadbelly at 2018-01-01 02:59 PM | Reply

"What sort of pension fund would allow years of underperfomance without changing managers?"

I thought the issue was that these pensions are underfunded, not that they are underperforming.

#45 | Posted by snoofy at 2018-01-02 12:44 AM | Reply

dave,

When you make statements like, "The top 10 tech firms in the world have amassed such large fortunes because they stayed long, not because of pump and dump schemes." You are reaffirming my argument that the basis of national strength is new wealth creation (production), not robbing Peter to pay Paul. There is a fundamental difference between actual production in which every participant gains in some way and secondary markets where the gain depends on taking advantage of less experienced participants. A difference our GDP fails to recognize in an emerging tax system which punishes work and rewards those who have figured out a way to get something for nothing. These policies will ultimately give China world leadership. The notion that a service economy can be as sound as a manufacturing economy is absurd. There cannot be a service economy with out a production economy to support it. Anyone that got rich by trading Apple or Amazon stocks is a parasite on society. Anyone that builds or repairs I=phones or cars is a productive member of society. Some of those parasites perform essential functions, such as doctors, but they are still an overhead to the cost of conducting business. We live in a society which values parasites more than workers.

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." Abraham Lincoln

#46 | Posted by bayviking at 2018-01-02 08:43 AM | Reply

"Anyone that got rich by trading Apple or Amazon stocks is a parasite on society."

what if that same person also worked their entire life? earned a W-2 wage, paid taxes, etc.

#47 | Posted by eberly at 2018-01-02 09:58 AM | Reply

Wait so a gal who repairs iphones is a productive member of society, but a physician who repairs bodies is a parasite despite performing an essential function?

GTFO

#48 | Posted by leadbelly at 2018-01-02 10:54 AM | Reply

Whilst pensions are nice for the recipients, they really are a bad business model and are going the way of the dinosaur. Paying people to be non-productive is illogical.

#49 | Posted by JeffJ at 2018-01-02 11:09 AM | Reply

It's going to be funny when all these useless, non-productive parents retire and have to move in with their kids because they ain't got no pension.

Especially when the doctoring, hospital, and pharmaceutical industries go through their real estate assets like a wake of vultures though a deer carcass.

#50 | Posted by madscientist at 2018-01-02 11:34 AM | Reply

"Whilst pensions are nice for the recipients, they really are a bad business model and are going the way of the dinosaur. Paying people to be non-productive is illogical."

Pensions are going away because they changed the corporate bankruptcy laws and let corporations count pension funds count as assets that can be liquidated and stolen. Some government pensions are going away because corrupt good old boys got kickbacks, etc. to make stupid investments with the pension funds

#51 | Posted by danni at 2018-01-02 12:27 PM | Reply

Pensions in no way make workers non-productive.

#52 | Posted by danni at 2018-01-02 12:27 PM | Reply | Newsworthy 1

The fund lost $6 Billion over the past decade, the underfunded commitment "could be as large as $50 billion."
RIF

#6 | POSTED BY RIGHTOCENTER

How much closer would it be to its funding commitment if it had gained the normal average 4-10% that most portfolios do?

#53 | Posted by Sycophant at 2018-01-02 12:33 PM | Reply

Just to be clear. I absolutely feel that all pension obligations should be met. People organized their lives around those promises.

#54 | Posted by JeffJ at 2018-01-02 03:08 PM | Reply

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