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The Morning Brief: UC Employee Union Attacks Hedge Funds

The University of California said the hedge funds in its investment program have “fallen far short of the expectations on which they were sold,” according to a new study by the UC system’s largest employee union, AFSCME Local 3299. The union said in an announcement that over 12 years, the university’s hedge fund investments cost the system nearly $1 billion in performance and management fees, asserting that the returns “largely mirrored the stock market.” The UC also said the hedge fund investments “failed to deliver on their twin promises” of downside protection and superior returns, adding that they were outperformed by the Standard & Poor’s 500 Index by more than 52 percent over the period.

“This study raises important questions about whether a decade of unprecedented austerity measures, tuition hikes, and pension cuts at UC could have either been minimized or avoided altogether,” said AFSCME Local 3299 President Kathryn Lybarger, in a press release. “At a minimum, we need higher levels of transparency and stakeholder engagement in UC investment practices to ensure that the hard earned dollars of UC students, staff, donors, and California taxpayers are being managed in a cost-effective fashion. UC’s hedge fund investments have fallen far short of this standard.” The study examined about $6 billion in hedge fund investments that UC holds in its $55 billion UC Retirement Plan and $8.9 billion General Endowment Pool.

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Deutsche Bank suspended its rating and estimates for Valeant Pharmaceuticals International on the heels of the controversial drug maker’s announcement that it will restate prior results, delay filing its annual report and remove prior 2016 guidance amid an ongoing board investigation.

“We have long been skeptical of the VRX business model that had formerly depended heavily on fast-paced acquisitions, aggressive cost cutting, tax arbitrage, aggressive U.S. price increases, and a heavy debt load,” the bank states in a note to clients. The stock slipped about half a percentage point Tuesday, on a day when the overall stock market surged more than 2 percent. As a result, it is trading at more than a three-year low.

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Viking Global Investors boosted its stake in Kite Pharma by about 200,000 shares, to 2.44 million shares, or 5 percent of the total outstanding. Viking has long held a big investment in drug and other health care stocks. However, in its fourth-quarter letter to investors, the Greeniwch, Connecticut firm — which runs hedge funds, a long-only fund and a hybrid fund — told clients its net exposure to the pharmaceutical and biotechnology industries stood at just 8.7 percent in Viking Global Equities, its main long-short fund, down from 21.3 percent a year earlier. Viking’s net exposure to the entire health care sector, however, rose to 15.2 percent from 13.1 percent at the end of the third quarter. That was down from 19.6 percent at the end of the second quarter and 19.4 percent from a year ago.

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Third Point’s Daniel Loeb, who sits on the board of directors of Sotheby’s, said in a regulatory filing he gave away his quarterly director compensation. The investor receives $18,750 per quarter for his director duties and elected to receive it in the form of 925 shares of Sotheby’s. He in turn gave away the stock.

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