February 02, 2007

Teachers and Hedge Funds – The Pension Connection

-- Pushpa Sathish, Staff Writer

Oh how quickly we forget! The ashes of Amaranth are not yet cold, and the San Diego County public employees’ pension has not yet healed fingers burnt in the collapse. But that has not deterred another state-run pension from throwing its lot with the hedge fund industry. Rising benefits and miserly funding from the state have pushed the $39 billion Teachers’ Retirement System in Illinois to seek high returns from the high risk world of hedge funds.

Teachers’ is not learning from the misfortunes of the $7.5 billion pension for the public employees of San Diego County – the fund invested $175 million in Amaranth and lost more than $85 million in under a month. It has recouped half the amount since then, but the fact remains that hedge funds are probably the riskiest investment vehicles in the financial world, especially for a bunch of school teachers.

Teachers’ may have been forced to jump on the hedge fund bandwagon tempted by the promised high returns, because it holds just 62 percent of the money needed to meet its obligations. But does it know that its choices are limited? Hedge funds are extremely secretive about their operations, and taking on public pensions as clients will force them to reveal information as per the Freedom of Information Act. They are also bound by state laws that restrict the scope of their investments – for example, an Illinois statute bans investments in Sudan.

The pension is not worried though – It understands and is well-equipped to monitor the risks involved, and is going in with “eyes wide open,” according to spokeswoman Eva Goltermann.

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