The Kresge Foundation knew they had taken the position
before it was published in the [Wall Street]
Journal, and were in Troy, Michigan,
according to Kresge CIO Robert Manilla, on May 15, referring to
the J.P. Morgan announcement a few days earlier of a $2 billion
loss in its London-based hedging unit known as the chief
Losses from the Whale Trade, as it is now known, are
estimated at close to $9 billion.
So with all that extra time to watch the trade unfold, what
do institutional investors think of that loss and its
consequences, both regulatory and reputational?
Manilla was, on that morning, sitting with seven other top
pension, endowment and foundation investors in New York City
for a roundtable discussion after Institutional
Investors Money Masters awards dinner. Joining
Manilla were Donald Lindsey, CIO at George Washington
University; Lawrence Schloss, CIO of the New York City Employee
Retirement System; Douglas Brown, CIO of Exelon Corp.; Conrad
Freund, COO of the LA84 Foundation; Sean Gissal, CIO at
Marquette University; Joshua Gotbaum, director of the Pension
Benefit Guaranty Corp.; and Lee Partridge, CIO at Salient
Partners and CIO of the San Diego County Employees Retirement
Editor Michael Peltz and Senior Writer Frances Denmark
facilitated the two-hour discussion, excerpts of which appear
below. The full roundtable will appear in the July-August issue
of Institutional Investor and, along with some other
timely excerpts, on the website.
Larry Schloss: It is terrible timing.
Robert Manilla: Yes, thats a huge
issue. If youre going to hedge, you have to spend money
to do it, and quite often youre going to waste that
money. We occasionally take views on the market, when we think
things are overbought or oversold, and well hedge it. We
set a hedging budget each year. Were willing to spend up
to almost a percent of the fund on hedging if we think there
are markets that need to be hedged, so thats spending
premium, usually. Hedging is expensive. Ideally, wed
rather just take the cash back and de-risk the asset
allocation, but thats not always an option.
Joshua Gotbaum: Theres another thing
thats going on, which is learning. As financial markets,
financial instruments and the global markets change, all
institutions are simultaneously in the process of taking risks
and learning about the risks theyre taking, and then
putting in place governance and oversight structures to manage
those risks once they understand them. Thats a
never-ending process. The fact that there was a mistake at J.P.
Morgan, and it wasnt caught, doesnt mean that
people shouldnt try to recognize the risks. It is that
they should pay attention and correct afterwards.