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Morning Brief: New Claims in Kentucky Retirement Systems Hedge Fund Suit

The pension system is being sued for investing in hedge funds even as its own advisers privately said it shouldn’t, according to new claims in an ongoing lawsuit.

  • By Stephen Taub

The Kentucky Retirement Systems are under fire for losing money on more than $1.5 billion invested in hedge funds — even as its own advisers privately recommended avoiding the asset class, citing “unacceptable risks,” according to new claims in a lawsuit filed by eight public employees, the Lexington Herald Reader reported.

KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management are being sued in an attempt to recover what KRS lost on hedge fund investments and management fees to those firms, plus damages, according to the report. Past and present KRS trustees and executives are also reportedly named in the lawsuit.

KRS is responsible for providing retirement benefits for about 365,000 past and present employees of state and local governments and faces a $27 billion pension shortfall, according to the report. The lawsuit asserts that in 2006 the KRS Board of Trustees deemed hedge funds were not a proper investment because they were too risky and KRS did not have the financial expertise to properly monitor them. KRS invested about $1.5 billion in hedge funds in three installments, the report said.

“Over the next five years, these black box vehicles provided very poor absolute and relative returns,” Louisville attorney Ann Oldfather wrote in a memo recently filed in Franklin Circuit Court. “The absolute return portfolio returned a miserable 3.73 percent from inception and lost over 6 percent — almost $100 million — in 2015-16.”

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Lansdowne Partners trimmed its management fee on its flagship Developed Markets Fund by 0.5 percent, to 1 percent, for clients invested in the fund for more than 10 years, according to the Wall Street Journal. The cut came earlier but was first reported by the Journal on Wednesday. It is the latest among a growing number of well-known hedge fund firms that have cut their fees in the past few years, including Moore Capital Management, Brevan Howard, Pershing Square Capital Management, and Tudor Investment Corp., to name just a few.

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Bill Ackman’s Pershing Square Holdings is up 1.3 percent this month through April 17. However, it is still down 7.4 percent for the year.

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