How do we know a Permanent Fund investment couldn't go up in smoke like those made with Bernie Madoff? We don't, at least not to 100 percent certainty. But a Madoff burn does not appear likely in the fund's future.
LIMITED PUBLIC DISCLOSURE
Not all of the Permanent Fund's investments are public information. One category of investment -- absolute return, or hedge funds -- has proprietary rules that keep investment information confidential.
Madoff struck in the absolute return realm, and right now the Permanent Fund has about $1.9 billion million invested there. Those investments are overseen by five "gatekeepers," outfits the fund has entrusted to spread its absolute return investments. Confidentiality rules allow us to know the gatekeepers -- Crestline Investors, Lazard Asset Management, Mariner Investment Group, Pacific Alternative Asset Management and Lehman Brothers -- but not where they are investing. Both gatekeepers and hedge funds keep their relationships confidential. To trade with them, an investor like the Permanent Fund has to follow suit. In addition, Alaska law requires nondisclosure in these cases, according to Permanent Fund spokeswoman Laura Achee.
We know only that the Permanent Fund is invested in 192 hedge funds, with the largest at $29.9 million and the smallest about $500,000, according to Achee.
LINES OF DEFENSE
Mike Burns, executive director of the Permanent Fund, said the fund uses two basic lines of defense.
First, the fund vets its gatekeepers with visits to their offices, interviews, reviews of internal controls, procedures and methods.
That process leaves him confident in the gatekeepers. In addition, fund managers have taken closer looks at some of the funds themselves. But the gatekeepers are the guardians, and the most reassuring evidence Alaskans have that they're on the ball is that one of them -- which one is confidential -- looked at Madoff's offer and advised hands off. Too little clarity about investment strategies, too much irregular in its operations.
"I was absolutely flabbergasted that thing got as far it did," Burns said of the Madoff scheme. "These weren't even caution lights, these were flashing red lights."
Second, the fund protects itself by the standard investment policy of spreading its risk. Five gatekeepers, 192 funds. That's not just protection against normal market hazards, but also against losses of fraud.
Burns doesn't claim that it's 100 percent proof against fraud. But he said hedge funds remain a reasonable part of the fund's overall investment balance and the track record is good -- "We haven't been burned."
The returns? Down, but that's marketwide and worldwide -- and the Permanent Fund's hedge funds aren't doing as poorly as its publicly traded stocks.
RESERVATIONS
Juneau economist Gregg Erickson has been a critic of the Permanent Fund's private investments, particularly over the lack of public disclosure. He's obtained heavily redacted reports on the funds, including the no-go on Madoff, but he isn't convinced all of the fund managers understand the strategies at work.
Alaskans are better off with more disclosure than less about how our Permanent Fund is invested. Burns said the fund is working with both its gatekeepers and the hedge funds themselves to win agreement on more disclosure. We wouldn't get the full picture, but we'd learn the identity of the 192 funds. We wouldn't learn which gatekeepers are putting what amounts in each fund.
Conclusion? No evidence suggests that Permanent Fund managers are taking anything but a careful course in hedge funds. But as Erickson says, without more disclosure, Alaskans can't judge for sure that they are.
Permanent Fund managers are asking us to trust them on this. Can we? Looks like it, so far. But we still like Ronald Reagan's old line -- "Trust, but verify."
BOTTOM LINE: Permanent Fund's management of hedge fund investments looks prudent but we'd like more disclosure.
Roger Cremo
Many Alaskans knew the late Roger Cremo, who died on Christmas Eve. I didn't know him well, but he was one of those people you remember.
Michael Carey, the former editorial page editor here, introduced me to him. If I remember right, Roger had come in to submit a piece about Alaska's fiscal gap. I'd heard of the Cremo Plan, his solution for a sustainable state budget.
Dry stuff; to tell you the truth, I'd have to look up the Cremo Plan to remember what it was. I do remember that he didn't argue numbers; he argued a state full of promise for people. That spirit took some of the dry out of the subject.
But what I really remember was his warmth, storytelling and public spirit.
He was the kind of man you looked forward to seeing. If he was an interruption, it was a welcome one.
He loved baseball and had great stories from his days as a minor league team owner. Several times, he started telling some of those stories in the office here and, after a minute or two, deadline didn't seem so urgent.
My experience of his public spirit came as an editor. We were editing by phone once. We had to cut his piece to fit the word limit, and I questioned some of his phrasing and word choices.
He wasn't a pushover. A lawyer, he could write, and if he thought he was right he'd say so. But he wasn't married to his prose, either. He was dedicated to the message, more than willing to look for the better word to express it. He liked searching for that word together. He was trying to connect, and he did.
-- Frank Gerjevic