PhillyDeals: Hedge fund loses money for Pa. pension, then closes

Posted: October 07, 2013

A hedge fund based on New York's Park Avenue that failed to deliver the profits that Pennsylvania's state pension system had been counting on has decided to cut its losses and shut down - even after the state begged it to try again.

The Pennsylvania State Employees' Retirement System (SERS) gave New York-based Tiger Management $250 million in 2012, expecting Tiger's genius investors would generate 8 to 12 percent annual profits. That would be $20 million to $30 million a year, without the usual up-and-down volatility of stock investments.

But instead of performing to hype, Tiger's custom-built Tiger Keystone Partners portfolio lost $1 million in its first year. One of Tiger's managers bet on gold, which fell, more than wiping out the profits its other managers made from the rising stock market.

At SERS's September board meeting, as I reported, trustees Oliver Mitchell, a corporate lawyer from Reading, and state Treasurer Rob McCord's representative at the meeting, John Lisko, protested the loss. Lisko urged SERS to pull out of Tiger.

But chief investment officer Anthony Clark, who had recommended the Tiger investment in the first place, urged patience. Longtime chairman Nicholas Maiale and his board of political appointees went along.

Then, on Oct. 1, Tiger sent SERS a "Dear Limited Partner" letter announcing it was killing Tiger Keystone and returning Pennsylvania's remaining $249 million.

"They didn't provide a reason for their action," SERS spokeswoman Pamela J. Hile told me.

Problem? "The windup of the partnership will have no effect on the system," Hile said.

Unless you count the $20 million to $30 million SERS Tiger was supposed to earn with Pennsylvania's money this year, but didn't. Or the profits the state might have earned someplace less fancy.

The system has about $26 billion invested, more than $17 billion short of its target if it is to keep paying all the pensions it owes. It can't afford losses: That makes the shortfall bigger, and forces taxpayers to contribute more each year to keep pensions solvent.

Money management is a special business. And not just because it pays better. It's a different standard: What would happen if the state police sent off a load of firearms for repair, and got them back unfixed, with a rifle or two missing? No effect on the system?

The folks at Tiger had nothing to say when I called.

It's no wonder other pension plans are abandoning the high-fee, private-fund-oriented strategy that has failed to keep Pennsylvania pensions solvent.

In Philadelphia, they're slowly moving more money away from private money managers and having civil servants buy and short more stocks, at a fraction of the cost.

Montgomery County commissioners fired their high-fee private managers, and hired Vanguard Group and SEI to buy low-fee index funds.

I don't know if they'll do better than the state, but at least their failures might be less profitable to private firms at public expense.

I asked McCord, a former fund manager, who wants to replace Gov. Corbett, what he'd do differently. McCord is comfortable with hiring private managers, his old pals.

But McCord says it's time to stop investing with "funds of funds" - such as Tiger - that reinvest state funds and pay sub-managers fat fees, which aren't reported by SERS as expenses.

"We can pay much lower fees, while earning the same level of return, with similar risk," McCord concluded.

Joseph N. DiStefano



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