Top to bottom, pension funds take a massive hit - East Valley Tribune: Business

Top to bottom, pension funds take a massive hit

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Posted: Sunday, December 7, 2008 12:53 am | Updated: 11:06 pm, Fri Oct 7, 2011.

 NEW YORK - College endowments and state pension funds plowed billions of dollars into hedge funds and private-equity investments as a way to balance their stock holdings, and for a time they got supercharged returns.

Those days are over. From Harvard University to the state pension fund of California, officials are watching the value of their alternative investments shrink.

So far, the losses are mostly on paper, but analysts say they could eventually lead to reduced payouts to retirees, higher taxes so state governments can fulfill their promises, or less cash available for colleges to give out financial aid.

“Everyone was in a desperate search to find returns,” said Colin Blaydon, head of the Center for Private Equity and Entrepreneurship at Dartmouth’s Tuck School of Business. “Now they have to face the dirty little secret that those investments aren’t in great shape.”

In recent years, endowments and pensions heaped cash into hedge funds — private investment funds that often use unconventional and risky trading strategies. And they also bought into private equity funds, which make direct investments into private companies or buy them out.

It’s too soon to know the depth of the damage from these investments. Annual results won’t be in until January for pensions and July for endowments.

• Harvard University announced this week that its endowment tumbled since July 1 by about $8 billion, or 22 percent, to about $29 billion, and said that “sobering figure” doesn’t fully capture its losses because it doesn’t reflect declines in its private-equity and real estate investments. It forecast total losses for its fiscal year ending in June 2009 could be as much as 30 percent, its worst performance on record.

• In California, the public pension fund Calpers says state, local and county governments may have to chip in as much as an additional 4 percent beginning in mid-2010 to cover its pension losses.

Its total assets had fallen from $260 billion last fiscal year to just $178 billion on Dec. 1.

After the dot-com stock bust wrecked their portfolios at the start of the decade, pensions and endowments poured cash into hedge funds, private equity, commodities and real estate.

For private-equity firms, the strategy was to purchase companies, strip out costs and flip them for a profit.

Investor cash and massive debt fueled their buying sprees. Critics say the party had to end.

Doug Kass, president of the Florida investment firm Seabreeze Partners Management, says hedge and private-equity funds overpaid for many takeovers, used too much debt to finance the deals and charged excessive fees.

So when bad times come and the now-private companies struggle, those investors will be the first to lose if companies go bankrupt or need restructuring.

“These funds relied on the kindness of institutional investors who were intoxicated by hysterical returns,” said Kass, who is known as a short-seller, or someone who makes bets on declines in the market.

Already, managers of hedge and private-equity funds are pressing investors to pony up more cash to avoid having to sell assets at fire-sale prices.

At the same time, some pension funds and endowments are looking to sell their alternative holdings — and get out before they’re hurt even more.

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