The $14.9 billion Kentucky Retirement Systems plans to end its controversial investments in hedge funds.
The KRS board’s investment committee on Friday reached “a general agreement” on a three-year plan to withdraw about $1.5 billion that KRS has invested in hedge funds over the last six years. Formal votes must follow for the committee on Nov. 2 and the full board on Dec. 1.
Hedge funds are privately run portfolios that try to make a profit regardless of market conditions. They can include combinations of stocks, bonds, real estate, commodities and other assets, some of them risky. Public pension systems in California, New York and elsewhere already have begun divesting from hedge funds.
The KRS board, with new members appointed by Republican Gov. Matt Bevin, wants to focus on more simplified assets with lower fees and greater liquidity, said David Eager, KRS executive director. With the largest pension fund for state employees only 17 percent funded to meet its future liabilities, there will be a greater need for cash flow in coming years, Eager said.
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State legislators, local governments and others have strongly criticized KRS for putting large sums into hedge funds despite their high fees, lack of transparency and lackluster returns. The Herald-Leader reported in August that KRS was doubling down on one such hedge fund, the Prisma Capital Partners’ Daniel Boone Fund, despite its negative 8 percent return in 2015.
Over the next two weeks, KRS chief investment officer David Peden and a member of the board’s investment committee, Neil Ramsey, will put together a formal plan to remove the state agency from hedge funds by 2019, Eager said. KRS pension funds presently have $1.1 billion in hedge funds, and its health insurance funds have $435 million in them, he said.
News of the divestment won rare praise from one of KRS’ most vocal critics.
“This is big news today. This is really a big reversal for KRS,” said Chris Tobe, a Louisville financial consultant who sat on the KRS board from 2008 to 2012. “I think it’s generally a good move. I don’t think we were getting much of value out of these.”
KRS is responsible for retirement benefits for more than 355,000 people who have worked for local and state government. It faces nearly $15 billion in unfunded liabilities, largely because the state government failed to contribute adequate sums for much of the last two decades. Only in the last few years has the General Assembly committed to full state pension funding.
Jim Carroll, who monitors KRS for an advocacy group called Kentucky Government Retirees, said he understood the arguments for and against hedge funds, so he never took a personal position on them.
“What KRS was attempting to do was find an investment that was less volatile than stocks that could provide a good long-range income,” Carroll said Friday. “The flip side, obviously, is that the performance these last few years hasn’t been good. Also, fee transparency has been an issue. This is public money, and we haven’t always known exactly what fees were being paid for these investments.”
“The cynical view is that individual investments don’t really matter at this point because the systems are so poorly funded,” he continued. “It’s really just tinkering around the periphery. No investment is going to make us 25 percent a year, and that’s what we would need to climb out of the hole we’re in, barring a substantial increase in contributions.”