{"id":304961,"date":"2010-02-10T14:57:25","date_gmt":"2010-02-10T19:57:25","guid":{"rendered":"tag:business.theatlantic.com,2010:\/\/3.35720"},"modified":"2010-02-10T15:00:02","modified_gmt":"2010-02-10T20:00:02","slug":"the-peril-of-public-pension-funds","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/304961","title":{"rendered":"The Peril Of Public Pension Funds"},"content":{"rendered":"

One of the mildly surprising things about the Stuyvesant Town debacle is the kinds of investors the deal attracted.  What were entities like CalPers and the Church of England doing plowing their money in along with real estate moguls like Tishman Speyer?<\/p>\n

The answer is “looking for alpha”.  Underfunded pension funds have been
\nlooking for extra return in order to make up the holes . . . and the
\nproblem is worst among public pension funds, because until recently,
\ntheir accounting wasn’t very good, so politicians were fond of making
\nunfunded promises in lieu of wages.<\/p>\n

Needless to say, public
\npension funds cannot necessarily afford to attract top investment
\ntalent, particularly since appointments tend to have a political as well
\n as financial component.  They’re thus vulnerable to making investments
\nthat aren’t in their best interest–not just in real estate, but in
\nthings like derivatives, as Felix Salmon notes<\/a>:<\/p>\n

\n

In
\n reality, it’s not the pension funds which are engaging in
\n“derivatives abuse”, but rather the investment bankers who sell the
\npension funds complex over-the-counter derivatives which make the
\nbroker lots of money and which rarely do any good for the end client.
\nAs Clavell says,<\/p>\n

\n

Let’s assume you work at a
\nPennsylvania school board, or
\na Swiss private bank, an Australian life insurance company, a German
\ncorporate treasury, a UK Pension administrator or any one of thousands
\nof other buyside entities, supposedly with sufficient expertise that an
\ninvestment bank can classify you as a non-retail customer.<\/p>\n

The more complex the structured product, the more opportunity for
\nagents to extract fees at your expense…<\/p>\n

Admitting you don’t know is pure alpha; you will not claim to have
\nany edge and this may put you off involvement in the product. If you
\nclaim you do know where the fees are, banks want you as a customer. You
\ndon’t know. Really, you don’t. Hang on, I hear you shouting that you’re
\nactually smarter than that, so you do know. Read carefully: Listen.
\nBuster. You. Don’t. Know.<\/p>\n<\/blockquote>\n<\/blockquote>\n

The fees are hardly the worst part; more worrying is that many public
\n pension funds and other public trusts are assuming risks they don’t
\nnecessarily understand.  They think they’re gaining alpha<\/a>–higher
\n expected value on their investments.  But often they’re confusing alpha
\n with beta, which is to say they’re getting higher returns not because
\nthey’re making good investments, but because they’re taking on more
\nrisks.<\/p>\n

I don’t think I need to convince many people that
\nhigh-risk, high-return investments are a bad way for public pensions to
\ntry to deal with their massive unfunded liabilities.<\/p>\n

Felix is
\nright that the investment bankers who push these sorts of things on
\npublic pension funds are, at the very least, doing something unsavory. 
\nBut they don’t deserve all the blame.  Public pension funds shouldn’t be
\n trying to make up their deficiencies by chasing unrealistically high
\nreturns.  Of course, if politicians and their appointees had the courage
\n to pay for the gifts they gave public employees, rather than looking
\nfor loopholes, we wouldn’t be in this mess in the first place.<\/p>\n



\n

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\n\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

One of the mildly surprising things about the Stuyvesant Town debacle is the kinds of investors the deal attracted.  What were entities like CalPers and the Church of England doing plowing their money in along with real estate moguls like Tishman Speyer? The answer is “looking for alpha”.  Underfunded pension funds have been looking for […]<\/p>\n","protected":false},"author":80,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-304961","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/304961","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/80"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=304961"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/304961\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=304961"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=304961"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=304961"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}