US funds propose transparency solutions

Congressman Al Green told a congressional committee: “If pension beneficiaries lose their retirement money because of bad hedge fund investments, taxpayers could be forced to pay for the pensioners’ social security.”

Andrew Golden, president of Princeton University Investment Company responsible for investing its $14.2bn (€10.7bn) endowment, said individuals that have exposure to hedge funds through pensions should rely on the sophistication of the scheme manager.

He said: “If congress is concerned this is not adequate protection, then perhaps the employee retirement income security act should be amended to restrict pension plans to investing only with registered advisers. Or the Pension Benefit Guaranty Corporation could base premiums in part on the extent to which a pension fund has investments with unregistered advisers.”

The act is a federal statute that sets minimum standards for pension plans in private industry. It created the Pension Benefit Guaranty Corporation, an independent agency that pays benefits if a plan runs into trouble.

Golden said Princeton’s annualised return during the past 10 years was 15.7%, with the university enjoying particular success as a hedge fund investor. The endowment spends at least 400 hours in due diligence before investing and 70 hours a year monitoring each investment.

He said fiduciaries had a duty to avoid making investments in assets they did not understand: “I don’t believe violators of this rule deserve sympathy or additional regulatory support. I believe those who violate in a significant manner deserve to be sued or prosecuted.”

Jeffrey Matthews, general partner at hedge fund Ram Partners, suggested hedge funds managing money for public pension funds should register with the Securities and Exchange Commission.

But Golden said: “Requiring SEC registration would be a feel-good measure that would offer little incremental protection. Princeton feels compelled to perform the same exacting due diligence on registered advisers as we do on unregistered ones.”

An SEC rule requiring mandatory hedge fund registration of managers was overturned last year by a federal court. James Chanos, founder of hedge fund Kynikos Associates, said instead of registration, the SEC could ask hedge funds to provide more information on the forms investment pools file when they sell securities.

Forthcoming hearings will focus on insider trading by hedge funds, potential risks to pension funds that invest in hedge funds and recommendations from the president’s working group on financial markets.

A report published by the group last month concluded greater regulation was unnecessary but more aggressive supervision of banks that lend money to funds would help to reduce systemic risk.