Archive for October, 2012

Are hedge funds worth it?

10 / 18 / 2012
by Charles Skorina | Comments are closed
One more time, are hedge funds worth it?
Comings and goings.

Shameless self-promotion:

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And now, on with our newsletter:

 
Comings and goings:

Michael Trotsky: Beantown's big pension gets a twofer:

The top exec at Massachusetts' MassPRIM pension just got a second big hat and a small pay-raise. Executive Director Michael Trotsky is now also officially chief investment officer of the $50 billion fund.

Previous CIO Stanley Mavromates earned $235 thousand base pay in 2011 (plus a $35 thousand performance bonus). Mr. Trotsky will now get a total base of $275 thousand, including a modest $50 thousand boost for his new duties.

But wait, there's more: Mr. Trotsky is also picking up a hefty performance bonus of $98 thousand, bringing his total comp for calendar 2012 to about $364 thousand.

Deputy CIO Hannah Gilligan Commoss inconveniently went on maternity leave in June, just as Mr. Mavromates left for a new, more lucrative job with Mercer. She was the obvious candidate for interim CIO, and Mr. Trotsky declined to name anyone else at the time, perhaps because PRIM already has a shortage of senior staff due to recent departures. So, he's actually been doing both jobs for the last four months.

An ED-cum-CIO is not unheard-of at big public pensions. Ash Williams, for instance, fills both roles at Florida State Board of Administration, running a $120 billion pension. But it's also not very common, since the two jobs tend to have different skill-sets. But Mr. Trotsky, with his Wharton MBA and experience as a hedge-fund manager, clearly has the horsepower to do the CIO's job.

Coming up with enough pay to hold senior talent has been a problem there for years. The previous executive director, Michael Travaglini, drew criticism from Springfield politicians for the bonuses he earned in 2009. As he left (for a job with Grosvenor Capital in Chicago), the exasperated ED told the press that "I have a wife and three children, and I'm going to provide for them...People can vote with their feet, and that's what I'm doing."

Doing without a separate CIO will free up about $250 thousand in their admin budget, which can be applied to the comp of other hires.

They've had some gaping holes in their org chart for months.

In addition to the empty CIO slot, both of their senior private equity officers have resigned over the past year, as well as the chief operating officer.

In a meeting in June the PRIM board's longest-serving member noted that the only senior investment officer still aboard is running their real estate and timber allocation. He complained that 90 percent of the portfolio currently has no dedicated senior staff running it.

The board seems to have decided that a long search for a new CIO would leave management in limbo for too long. Mr. Trotsky told his board in June that "A leading PE candidate just pulled his hat out of the ring" because he didn't know who his new boss would be.

PRIM previously floated an RFP to hire a recruiter for the search, a process which is now obviously suspended, at least for now.

Some deserving executive recruiter will miss a payday this winter, but under the circumstances, the board probably did the right thing.

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David Loglisci: A busted CIO finds a new career in Oklahoma:

We ended a piece in our last newsletter with a little rhetorical flourish, noting that, at bottom, running an investment portfolio is just a business: like running a carwash.

Then, last week, the real world responded with a strange mash-up of investing and car-washing.

In a New York City courtroom, David Loglisci, former chief investment officer at New York State's $140 billion CRF pension fund, was finally sentenced for his role in a pay-for-play scandal which engulfed him, his boss (former state Comptroller Alan Hevesi), and numerous others.

His lawyer told the judge that his client, the disgraced ex-CIO, has recently focused on running a carwash in Oklahoma.

Mr. Loglisci, who holds both a law degree and an MBA from University of Notre Dame, was a vice president at Salomon Smith Barney who left investment banking in 2002 to join the state pension in Albany. This involved a 70 percent pay-cut, and was the first in several bad decisions which ultimately led him to that carwash.

We won't recap the whole convoluted story, but a couple of points are worth mentioning as these final shoes drop.

Mr. Loglisci told the judge that he had "...entered an environment where political considerations were a customary part of the decision-making process," which may have been self-serving, but is also obviously true.

 

Hank Morris, who was a political ally of former Comptroller Hevesi, was the kingpin of the scheme, and is said to have collected $19 million in pay-offs for helping to steer some $5 billion of alternative investment mandates to favored parties. Both he and Mr. Hevesi are now serving prison terms.

Mr. Loglisci not only sold his office, he seems to have sold it for virtually nothing. His only clear benefit was money which flowed to his brother from investors who helped finance a movie called "Chooch." Set in Hoboken, New Jersey's Little Italy, the alleged comedy played in three theaters and earned a total of $30,792. If you navigate to www.choochthemovie.com, you can still enjoy the trailer, buy the DVD, and get Chooch-related merchandise.

Mr. Loglisci obtained a conditional discharge from the judge, which means he walks without even a parole period, although he has had to surrender his law license.

The light punishment was mostly because he cooperated with the state prosecutors to help nail Mr. Morris and Mr. Hevesi. But, perhaps, also in part because even the hardened Supreme Court judge could hardly credit Mr. Loglisci's ineptitude for graft.

"You sold out and you didn't get any money for it," marveled Justice Stone, "which shows how naive you were."

We agree. Mr. Loglisci makes Voltaire's Candide look like a sophisticate. He clearly wasn't cut out for politics, and will probably be happier and more productive washing cars in Oklahoma City.

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Kristen Gilbertson: "Mission accomplished" at Penn:

 

Kristen Gilbertson, chief investment officer at the University of Pennsylvania endowment, issued a "mission accomplished," announcement this week and has left the campus. That's a fair assessment of her work and, as far as we know, she didn't put on a flight-suit to mark the occasion.

She will still have an advisory role until the end of the year, but David Harkins, head of the public equities team, is stepping in as interim CIO while a permanent replacement is sought.

Ms. Gilbertson took the job in 2004, following the school's first CIO, Landis Zimmerman (now CIO at the Hughes Medical Institute) who set up the investment office in 1998. In her eight-year tenure the endowment grew from $3.9 billion to $6.8 billion. Ms. Gilbertson, who earned her MBA at Stanford University, had previously headed the public equities team at the Stanford Management Company.

Her most notable accomplishment was to lose less money than her Ivy peers in the financial crisis of 2008/2009. Penn was down only 16 percent in fiscal 2009, compared to losses of 27 and 25 percent at Harvard and Yale, respectively. That, plus decent returns since, have let her fund recoup all of its losses, which many schools still haven't done three years later.

Ms. Gilbertson told the Wall Street Journal in 2009 that she had started reducing her public equity allocation in early 2008 - from 53 percent to 43 percent - and put about 15 percent in Treasurys.

Market timing isn't supposed to be the forte of endowment investors, but it certainly worked that year. Those highly liquid Treasurys were one of the few assets to hold their value over the period. And it meant that Penn didn't face a cash-crunch when their PE partners issued capital calls.

In our list of non-profit CIO salaries last year (soon to be updated!), we ranked Ms. Gilbertson number 25, with total comp of about $961 thousand. The CIOs of Harvard, Yale, Columbia, Princeton and Brown were pulling down $4.8, $3.8, $3.5, $1.5, and $1.0 million, respectively according to the latest numbers available back then.

In our celebrated Pure Performance study last month, we ranked Penn number 9 out of the ten largest endowments for performance in the five years 2007-2011. Their annualized return was 5.4 percent for that period. Among the Ivys, Columbia, Yale, Princeton, and Harvard all did better, with returns of 8.8, 6.0, 6.0, and 5.6 percent respectively.

But, measured by Sharpe ratio, Penn did better, ranking 7th out of the ten biggest endowments. On this risk-adjusted basis, they slightly out-performed Yale, Princeton, and Harvard.

For the fiscal year just ended in June, all the Ivys except Cornell and Princeton have reported their returns and so far Penn is in the middle of the pack with 1.6 percent for FY2012. Dartmouth leads with 5.8 percent and Harvard held the bottom spot with a loss of 0.05 percent.

Flanking Penn on the up-side were Yale and Columbia, posting 4.7 and 2.3 percent returns. Just below Penn this year, Brown reported 1.0 percent.

Ms. Gilbertson is still only forty-ish and has a super resume. She certainly must be regarded as a hot prospect for another high-level institutional job and it will be interesting to see where she turns up next.

 
The Hedgies strike back: AIMA takes aim at Simon Lack:

This spring, a book provocatively called The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to be True was widely reviewed in the financial press.

Our own review, which we think was one of the more informative ones, is here: http://www.charlesskorina.com/the-skorina-letter-no-37/

The author, Simon Lack, worked for years at JPMorgan, sussing out hedge fund investments for JPM's high net-worth private-banking clients.

Following Mr. Lack's critique of the hedge fund industry requires plowing through some statistical arguments. Crudely over-simplified, it amounts to saying that the returns touted for both individual firms and the industry generally are misleading because they are - in math-speak - time-weighted rather than dollar-weighted. The typical investor, he says, has not gotten those headline returns, and is even less likely to get them in the future.

He is not down on hedgies across the board; he acknowledges that some of them are amazingly good investors, and that some of the customers have done very well (including those for whom he worked at JPMorgan). But it's not a fun read for hedge fund marketers who are, in any case, not having a good year.

We summarized Mr. Lack's argument in our review. Or, if you want a short version straight from Mr. Lack, you can look at this article he wrote for AR magazine a couple of years ago, which was the kernel for his book. It was:

Hedge Fund IRR Has Been Pathetic

...and you can find it here.

http://www.institutionalinvestorsalpha.com/Article/2728122/Hedge-fund-IRR-has-been-pathetic-Magazine-Version.html

We thought back in April that his argument was credible, and backed by some respectable academic work (including Dichev and Yu's Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn [2009]).

Just this past week for instance, we note that the high-profile financial journalist James B. Stewart cited Mr. Lack favorably in the New York Times, including a marquee quote from the book: "If all the money that's ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good."

The HF industry, we thought, is going to have to respond directly to this. They can't afford to let the Lack critique become conventional wisdom.

And so it has. While we were taking a break this summer, the London-based industry group AIMA (Alternate Investment Management Association) issued a rebuttal. It's a 24-page paper entitled "Methodological, mathematical and factual errors in 'The Hedge Fund Mirage.'"

You can check it out here: http://www.aima.org/

Over at Reuters, writer Felix Salmon has given the AIMA paper a careful read and rendered up a pretty devastating response:

...the AIMA paper has convinced me of the deep truth of Lack's book in a way that the book itself never could. Reading a book, it's often very hard to judge just how reliable the author is, or how cherry-picked the data might be. But if a high-profile hedge-fund industry association spends months putting forward a point-by-point rebuttal, and that rebuttal is utterly underwhelming, then at that point you have to believe that the book has pretty much got things right.

http://blogs.reuters.com/felix-salmon/2012/08/08/why-investors-should-avoid-hedge-funds/

You have to feel AIMA's pain. On the one hand, a full-court rebuttal like this tends to re-publicize Mr. Lack's argument, perhaps to people who hadn't even noticed it before. On the other hand, it was getting too much attention to let it pass unchallenged.

Readers can go to the sources and draw their own conclusions. But right or wrong, it's obvious that Mr. Lack drew blood.



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