Tuesday, July 16, 2013

NC Senate Finance Committee to consider Alternative Investments Bill tomorrow.

The proposal by the NC State Treasurer to increase the alternatives allocation in the State Pension Fund continues to make its way through committee.   The details of the bill are here.  As I've blogged before, this bill allows the State to invest up to 40% in private equity, real estate and hedge funds.  Treasurer Cowell, appearing on CNBC, argued that the poor outlook on bonds makes alternatives an attractive option.

I respectfully disagree (and others share my view).  Alternatives, and in particular - hedge funds and private equity - are very risky, have very high fees (2% + 20% of all profits is not uncommon), are very illiquid (you can't get your money out), and are very opaque.  On top of that there is little evidence that they outperform more conventional investments.  Hedge funds rely heavily on borrowed money to boost returns - and thus are also sensitive to interest rate increases that could hurt traditional bond portfolios (a point made by Andy Silton today).

The solution to the State's pension shortfall is to slash the hundreds of millions that it pays to Wall Street managers, and to manage the portfolio in passive manner.   This is the only way that will give the Fund a fighting chance of meeting the retirement needs of North Carolina's public employees.

It is worth noting that Ms. Cowell raised the fifth largest campaign fund in the 2012 election.  A total over $1 million.   What is particularly interesting is that one third of her campaign contributions came from "Lawyers and Lobbyists".   Perusing the list of donors is quite enlightening - a great many are from law firms in the north east.   This begs the question - "why are New York lawyers funding the State Treasurer race in NC?"   I obviously can't comment on anyone's personal motivation, but I will note that investing in hedge funds and private equity is very unlike buying stocks.   These investments are very idiosyncratic and require a great deal of legal advice to create the investment contract.

Until recently, investment advisors could make big campaign donations to political campaigns, but the SEC "pay to play" rule took care of that influence.   It would seem time for the SEC to expand this ruling to include securities and investment law firms as well.

As I've stated before, this blog represents my personal views and not that of my employer. Furthermore, I write this blog on my own computer at home.