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Alaska Permanent Fund Corp. says it will stick with hedge funds

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published September 28, 2014

JUNEAU -- The Alaska Permanent Fund won't be following the lead of California's huge CalPERS public pension fund, which just made the startling decision to stop investing in hedge funds.

But Mike Burns, executive director of the Alaska Permanent Fund Corp., which manages the Permanent Fund, says he understands why CalPERS managers did what they did.

"We think about it all the time," he said.

Hedge funds were created to "hedge" risk similar to an insurance policy. Big investors would use hedge funds to balance investment risks, like making investments that would go up if the stock market was to fall.

But they soon took on a different connotation, as some hedge fund managers were able to pick investment strategies that brought in outsized profits, and with them huge paydays for fund managers.

In recent years, however, the U.S. stock market has been on a tear, including pushing the Permanent Fund to returns of 15.5 percent last year, about twice its general goal.

During that time, hedge fund returns in Alaska and elsewhere have lagged the stock market's torrid performance. Now, managers of pension funds, endowments and sovereign wealth funds are questioning the values of hedge funds, as well as their cost.

"They're expensive," Burns acknowledged.

The action by the more than $300 billion CalPERS fund sent shock waves through the investment world, but Permanent Fund managers who discussed the issue at this year's annual meeting in Juneau said there are important differences between Alaska's fund and CalPERS.

APFC Chief Investment Officer Jay Willoughby said CalPERS was having trouble finding enough hedge funds to invest in to have a meaningful impact on the huge fund. It had sought to invest 6 percent in hedge funds, but couldn't get above 3 percent, an amount that wasn't enough to make a meaningful impact on a fund the size of CalPERS.

"It just doesn't move the needle," Willoughby said. That lack of scale, combined with modest returns and high cost, prompted the decision in California.

At Thursday's meeting in Juneau, Permanent Fund adviser Gregg Allen of San Francisco-based investment consultant Callan Associates said he supported the CalPERS decision.

"I'm from California, and as a taxpayer I'm glad they changed their philosophy on that," Allen said.

But he didn't recommend Alaska do the same.

Burns said that most hedge funds are relatively small, with the Permanent Fund holding stakes in 120 different funds. It hires three separate "fund of fund" managers to pick hedge fund managers to serve Alaska's needs. That structure further raises costs, he said.

Burns said the Permanent Fund currently has 6 percent invested in hedge funds, near CalPERS' goal.

And they've been a good investment for Alaska he said, even if they've recently lagged the roaring U.S. stock market.

The $51 billion Alaska Permanent Fund uses hedge funds to minimize risk and reduce the fund's overall volatility.

"They're mitigating risk, Burns said. "They're doing what we hired them to do, but it doesn't look very sexy right now."

During the financial crisis, Alaska's hedge fund investments did what they were hired for, but losing less than other investments didn't look very sexy at the time, he acknowledged.

"They did what they were supposed to do, but the crisis wasn't pretty, and nothing was pretty," Burns said.

Willoughby told the fund's Board of Trustees that CalPERS' action could benefit Alaska by putting pressure on hedge fund managers to compete on fees, and reduce costs to the Permanent Fund.

Contact Pat Forgey at pat@alaskadispatch.com.

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