Monday Money Tip: Are hedge funds worth the fees? Answer is mixed

Posted: June 03, 2014

Pennsylvania's Public School Employees Retirement System (PSERS), the 18th-largest state-sponsored, defined-benefit public pension fund in the nation, runs money for more than 400,000 teachers and retirees. And PSERS likes hedge funds.

But are hedge funds worth it?

PSERS oversees assets of $50.4 billion. Roughly 10 percent, or $5 billion, of that is invested in hedge funds, which generally charge 2 percent of assets and 20 percent of performance annually. An index mutual fund typically charges much less, say, 0.50 percent a year.

PSERS, until this past April, was an investor in a controversial hedge-fund shop known as BlueCrest Capital Management's BlueTrend fund, with $216 million, about 4.1 percent of PSERS's portfolios of hedge funds.

BlueCrest and other hedge funds are paid incredible fees. In the fiscal year ended June 30, 2013, PSERS paid BlueCrest $6.4 million. PSERS also paid Brevan Howard Asset Management L.L.P. in the Caymans $12.5 million, and Bridgewater Associates, a hedge fund in Westport, Conn., $21.4 million.

Are they worth the fees? The record is mixed. PSERS Absolute Return portfolios (which lump in all hedge funds) earned 4 percent the year ended June 30, 2013, and 6.54 percent in the three-year period ended June 2013. They didn't even beat PSERS's own in-house bogey of 7.5 percent annually.

A PSERS spokeswoman says the system liquidated from BlueTrend based on "performance" as the fund fell 7.2 percent. Good timing: Last week, it emerged that BlueCrest may run a secret, internal fund for just its own employees, one investors didn't know about. What should investors be asking of BlueCrest now?

Scott Berman, partner at Friedman Kaplan Seiler & Adelman L.L.P. in New York, advised: "As a current or former investor, I would like to know whether this internal fund existed, how they allocated trades, or what safeguards are there. There could be a serious conflict of interest."

215-854-2808 @erinarvedlund

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