The State Treasurer has taken a look at the hedge funds, and the state are moving to simpler financial instruments, which have far lower fees, and actually perform at least as well.
Of course, low fee funds don’t have the money to spend on political donations, so I do wonder how long it will be until the state legislature starts pushing back over this:
Pennsylvania Treasurer Joe Torsella last month told the world he’d pulled the state’s money — or at least the slice he oversees — “out of all so-called hedge-fund investments, resulting in [over] $14 million in annual fee saving.”
The claim sounded familiar. I looked it up, and sure enough Torsella had announced back in April 2017 that he was moving $2.4 billion in state funds away from private investment managers into a “passive investment strategy, saving an estimated $5 million per year in fees.”
The 2017 purge was against “actively managed” stock investors. This fall’s move, dumping nearly $500 million out of hedge funds, was “the next installment,” Torsella spokeswoman Ashley Matthews told me.
This was smaller than the stocks move (just one-fifth of the assets), but also bigger (almost three times the fee savings).
The move reflects Torsella’s long-held position to put more state pension money in low-cost index funds while avoiding high-fee hedge funds.
Through a company called Aksia, a “fund-of-funds” manager hired under Torsella’s predecessor Rob McCord, Pennsylvania employed more than 50 hedge funds — such big firms as BlackRock D.E. Shaw, and Philadelphia’s PFM, as well as more obscure investors in a web of hedging strategies — to invest a slice of Pennsylvania families’ Tuition Assistance Program (TAP) money.
What does the record show? Since 2013, Aksia and its funds were paid more than $100 million by the Pennsylvania treasury — $15 million a year — in fees and shared profits (“carried interest”), for managing that not-quite-$500 million.
How’d they do? According to Treasury data, after paying those fees, the hedge funds returned an average of less than 4 percent a year over those 6½ years. That is less than the college savings plans’ long-term target for all investments, which is 6 percent a year.
This is an unalloyed good.
First it means that the taxpayers of the state of Pennsylvania are no longer being ripped off, and second, it represents a claw-back of power and money from Wall Street.