Riley: Junk Bond Collapse Hits RI Pension Fund
Tuesday, December 15, 2015
Gina Raimondo’s hedge fund strategy designed to improve returns is a total bust and soon we will find out just how bad it really is when November and December 2015 returns are reported in Rhode Island.
Last week, the big news on Wall Street was the nearly unprecedented close of Third Avenue Focused Credit Fund, a mutual fund dedicated to high yield investments. The fund, which is supposed to provide daily liquidity to all investors, halted investor redemptions and announced it may take one year to liquidate and return investor money. The State of Rhode Island Pension Fund has several investments in the same focused credit and absolute return hedge fund space. This deliberate strategy has been a failure and the selections by Cliffwater, Rhode Islands highly paid alternative investments expert, have fared poorly. As of October 31, 2015 the 2016 fiscal year returns have been negative 1.64% and almost zero for the full calendar year 2015.
If Rhode Island government officials or the main stream media were concerned about the over $1 Billion dollar shortfall in the State Pension Fund over the last year they would have also noticed the recent months' evaporation of another few hundred million dollars of retirees money. Certainly Raimondo who hid Nabsys collapse or Treasurer Magaziner whose performance is worse than any year since 2008. Neither is likely to tell you about the high yield or junk bond exposure in the Raimondo hedge fund experiment. As many of you know, I manage a tiny hedge fund, and I am deeply concerned about the State retirees and taxpayers exposure to the junk bond crisis. Recent redemptions by the State in hedge funds Blue Crest and Claren Road have been very costly. Only recently did Rhode Island exit Claren Road almost one full year after investors nationwide had already redeemed $1.9 billion.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTWhy did Magaziner hang on? Claren Road losses totaled -15.08% over the last 12 months, before redemption last month. Blue Crest was down 3.57% before redemption. Brigade Leveraged Capital Structures Fund LP is down 8.41% in fiscal yaer 2016 and acting suspiciously like the high yield funds that were recently hit with huge losses. The losses that hit the now shuttered Third Avenue Focused Credit Strategies Fund accelerated over the last 6 weeks, so we don’t even know yet how bad the losses in Rhode Island will be. Another hedge fund picked by Cliffwater and Raimondo was Brigade Leveraged Capital Structures Fund LP. The most recent results for Brigade are dated October 31, 2015 and are deeply concerning as mentioned above. It’s not like Brigade or Blue Crest or Claren Road ever performed well for Rhode Island with average annual returns of 0.37%, 1.78% and -6.2% since their inception in Rhode Islands pension portfolio and selection by Cliffwater in 2011 and 2012.
How does "survivorship bias" affect returns in Rhode Island
Here is a study that I would have thought would have been part of a “forensic “ study on the Hedge Fund performance in Rhode Island. But as far as I know Ted Siedle didn’t even embark on this very obvious study. Here is a definition of Survivorship Bias:
A bias (distortion) that occurs if the database of hedge funds only includes information on surviving funds, i.e., those that continue to operate and report results to the database vendor. The compiled data series reflects only funds that have survived to the end of a given period. This occurrence incorrectly impacts the process of measuring the performance of a hedge fund (or generally a portfolio). It is determined as the difference in return in funds which are defunct or no more in existence and such which survived.
In other words, if Rhode Island could pretend the next month that it had never invested in Claren Road then they could then say they had a higher average return overall over a longer period of time. Rhode Island would never do that right? Well I wouldn’t be so sure and would recommend that Ted dig into this one.
The results could be very interesting and shed more light on how this very complex and expensive portfolio is performing. I estimate that the State Pension fund is down significantly for the year 2015 and also Fiscal year 2016. Retirees and taxpayers should expect that any so called budget “surplus” for 2015 be used to pay down our unfunded liabilities as promised by the General Assembly and Lincoln Chafee.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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