Politics & Government

Major hedge fund tells Kentucky Retirement Systems to take its $68 million and leave

One of the nation's largest hedge funds is cutting ties with Kentucky Retirement Systems, telling the state pension agency to withdraw its $68.7 million investment because it does not care for the scrutiny hedge funds are getting in Kentucky.

Davidson Kempner Capital Management, based in New York, registered two complaints, KRS executive director David Eager said Wednesday.

One, Davidson Kempner does not want to abide by the investment manager codes of ethics and professional conduct that was mandated by last year's Senate Bill 2, a pension transparency bill, Eager said.

Among other things, those codes require that clients' interests must come first, that managers must use prudent judgment when handling assets and that managers must not accept outside compensation that could create a conflict of interest with their clients' investments. The codes were written by the CFA Institute, a global association of investment professionals.

Two, he said, Davidson Kempner was unhappy about a lawsuit filed against several other investment companies that sold up to $1.5 billion in hedge funds to KRS. The suit, brought by eight public employees with KRS pensions, alleges that KRS was cheated on those investments. Davidson Kempner was not named in the suit, but it is worried because hedge funds were the target, Eager said.

Other private equity managers have objected to the codes of ethics and professional conduct required by SB 2 — and one manager has refused to take KRS' money to begin a new investment — but this is the first time that an investment manager has rejected KRS' money after holding it for years and told the pension agency that their relationship was over, Eager said.

"There could be a problem here. But we just don't know yet how significant it's going to be," Eager said. "An increased desire for transparency and accountability is being written into a lot of legislation around the country, and that is going to create difficulty in some of our efforts to establish business relationships with the people we want to."

A spokesman for Davidson Kempner declined to comment to the Herald-Leader on Wednesday.

The $16 billion KRS is responsible for providing benefits for 372,524 active and retired public employees in Kentucky. It faces an unfunded liability of $27 billion.

A 2017 KRS financial report indicates that the state pension agency has been invested in Davidson Kempner for at least a decade, with average returns for its hedge fund portfolio — 3.6 percent return over the previous three years and 6.1 percent over the previous five years.

KRS is in the process of reducing its overall hedge fund allocation from 10 percent of its assets to 3 percent, in part because of the cost of their fees, Eager said.

State Sen. Joe Bowen, who sponsored SB 2 last year, said he's not worried about KRS losing the services of any hedge fund manager that doesn't want to comply with his pension transparency bill. There is nothing in the codes of ethics and professional conduct or in the bill that should pose a problem for any legitimate investment manager, Bowen said.

"You know what, if they want to fire us because they can't comply with the transparency and accountability standards that we've put in place, then that's OK with me," said Bowen, R-Owensboro. "I'm not anxious to stand down on the standards of Senate Bill 2 in order to accommodate them on any of these issues. If these hedge funds are pushing back, that's too bad."