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STUDY: UC’s Hedge Fund Investments Prove Costly and Fall Short of Expectations

Watchdogs Call for More Transparency and Heightened Scrutiny of UC Investments

The University of California’s twelve-year experiment with Hedge Fund Investments has fallen far short of the expectations on which they were sold–costing the system nearly a billion dollars in performance and management fees for returns that largely mirrored the stock market, according to a new study by the UC system’s largest employee union, AFSCME Local 3299.

In addition to their high cost, UC’s hedge fund investments also failed to deliver on their twin promises of downside protection and “superior returns,” and were outperformed by the S&P 500 Index by more than 52%.

The report, entitled “Missing the Mark: How Hedge Fund Investments at the University of California shortchange students, staff and California taxpayers” explores the history and performance of the UC’s largest Hedge Fund holdings.

Click Here to Read the full research paper.

“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. “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.”

Focusing on about $6 billion in hedge fund investments that UC currently holds in its $55 billion UC Retirement Plan and $8.9 billion General Endowment Pool, the study examines the promises on which these investments were sold, compares the performance of UC’s hedge fund holdings with more traditional asset classes, and applies a methodology even more conservative than the industry standard “2 and 20” fee structure to determine the overall cost of UC’s hedge fund investments in performance and management fees.

The study’s key findings include:

·  A Billion Dollars in Fees: UC paid hedge fund managers a dollar in fees for every two dollars generated in net returns. UC could have saved $950 million in fees and generated the superior returns by investing in low cost, traditional asset classes.
·  Performance Mirrors Overall Stock Market at Higher Cost: While being sold a promise of “absolute, positive returns” uncorrelated with the volatility of the Stock Market, UC paid a billion dollars in fees for returns that largely mirrored the overall stock market.
·  Hedge Fund Fees Drag Down Net Returns: Because of the extraction of large management and performance fees from gross returns, UC’s hedge fund holdings have routinely underperformed its overall pension and endowment funds—costing more than $783 million in investment returns over 12 years.

“Using all of the publicly-available information about UC’s hedge fund investment strategy since its inception, this study documents that is has provided almost no hedging in bad times and below-market returns in good times. Moreover, this complete lack of promised hedging performance is compounded by enormous fees which come at the expense of the UC’s stakeholders,” said Thomas Gilbert, Assistant Professor of Finance & Business Economics at the University of Washington’s Foster School of Business.

In 2014, the California Public Employees’ Retirement System’s (CalPERS)—the nation’s largest pension plan–announced it would divest its $4 billion stake in hedge funds because it felt they were too complicated and expensive.

“Unfortunately, high fees and disappointing returns is all too common for institutional investors in a largely unregulated marketplace. There needs to be much more transparency and public engagement around the merits of these products, in particular, at public institutions where students, staff and taxpayers wind up footing the bill when they fall short,” said Alexis Goldstein, Senior Policy Analyst at Americans for Financial Reform.

During the twelve-year period explored in this study, UC student tuition increased three-fold, academic services were cut, and staff were asked to contribute considerably more into their pensions. UC has also asked State Taxpayers to contribute considerably more towards its operations, and particularly the unfunded liabilities of the UC Retirement Plan (UCRP).

“Over the last seven years, UCRP’s hedge fund investments have underperformed UC’s other investments by an estimated $478 million. This amounts to more than the $436 million UC anticipates getting from the State Legislature over the course of three years to help pay down the pension plan’s unfunded liability,” the report notes.

The release of “Missing the Mark” comes as UC considers a new round of pension changes that would dramatically cut the earned benefits of most of its faculty, doctors, and skilled professionals. Thousands of UC staff have warned that such cuts could undermine the university’s ability to recruit and retain top quality staff who could receive higher paychecks elsewhere.

“More pension cuts could do irreparable damage to UC’s ability to attract world class faculty, doctors and researchers,” said Joe Kiskis, Vice President of the Council of UC Faculty Associations (CUCFA). “Before any such actions are considered, UC has a responsibility to its students, staff and taxpayers to provide more transparency around its investment holdings, and more stakeholder engagement in the way these assets are managed.”