Moore: Will Magaziner Protect Rhode Island or Wall St.?
Monday, June 08, 2015
It took another $20,000 kickstarter funded campaign from Edward "Ted" Siedle to tell us what we already knew: hedge funds, and other "alternative" investments cost more money in fees and increase, not reduce, risk.
Siedle is a former Securities and Exchange Commission lawyer and columnist for Forbes.com, who has been highly critical of former Treasurer and now Governor Gina Raimondo's management of the Rhode Island pension system.
But none of what he found was really news. Industry observers who haven't drank the hedge fund Kool Aid have long been aware that hedge fund investments garner increased risk, not less, and astronomical fees. The state of Rhode Island is paying somewhere around $70 million per year in fees.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTSiedle believes the move into hedge funds has cost the Rhode Island pension fund somewhere around $2 billion when fees are combined with the opportunity cost of losing potential gains by not investing in more traditional investments, which he points out would have been more productive.
So now the big question remains. Will new Treasurer Seth Magaziner begin to transition the state pension fund away from the risky, expensive alternative investments and back into the boring, yet safer and more reliable and productive so-called index fund investments. A popular index fund is the S & P 500, a composite of the 500 largest public corporations in the market.
History
The move to hedge funds was sold to Rhode Islanders by then Treasurer, and now Governor Gina Raimondo as part and parcel to state pension reform, which drastically reduced the unfunded liability in the state pension system. (The unfunded liability is the amount of money that the state would owe to pensioners if everyone who was owed a benefit demanded it in total at the present time).
But the management of the state pension fund's investments has little to do with the need to scale back benefits in 2011, due to a under-funding and over-promising of benefits. Both sides, the state's public sector unions and Raimondo wanted to combine the two issues. It allowed the governor to conflate pension reform, which had merit, with the management of the fund in an effort to deflect criticism of the risky hedge fund investments.
On the union side, it allowed the state's union leaders to make it seem like benefits were reduced simply to enrich Wall Street. While that may not have been the case, as Raimondo could have advocated for pension reform while adopting traditional index fund investing
It remains to be seen whether or not Magaziner will make the obvious move--drastically reduce the amount of money put into "alternative investments". To his credit: Magaziner has slightly reduced the amount of money the state invests in hedge funds, but so far it's been a drop in the bucket--moving out of a few smaller funds.
Magaziner recently unveiled his transparency initiative. Going forward, every money manager who invests Rhode Island pension fund money will have to agree to release basic information about how the money is being invested. Assuming the new pledge is enforced--and that's no guarantee as it very well may have been a public relations ploy--hedge funds that rely on secrecy may be purged from the Rhode Island pension fund.
Transparency Pledge
Let’s not forget: a pledge of transparency (not to mention much better investment fund returns) was one of the hallmarks of Magaziner’s campaign for RI Treasurer last year.
While it remains to be seen if Magaziner makes good on his transparency pledge, give Siedle's report, he's not optimistic. In his report, Siedle makes it seem that thus far, Magaziner has been running the Treasury much like his predecessor.
"For now, it appears the new Treasurer—like his predecessor—is more interested in shielding Wall Street from public scrutiny than protecting public retirement assets from Wall Street," Siedle writes.
Siedle explains his interactions with the state Treasurer's Office as unproductive and adversarial. It cost him over $7,500 to collect the records he needed to finish his report.
If Magaziner wants to make a positive mark on Rhode Island politics, increase his marketability for higher office, and get out of the shadow of his mentor, Gina Raimondo (Magaziner worked as an intern under Raimondo at the firm she founded, Point Judith Capital, before she got involved in politics), Magaziner should get Rhode Island out of hedge funds completely.
The result would be better returns, lower fees, and more transparency. Those are all good things for the general public.
It would, however, make it more difficult for him to raise money. And it would anger Raimondo. Both of those things don't make sense as far as inside politics goes. (Remember: Magaziner claimed to dislike insider politics when he was a Brown University student.)
So Magaziner has a choice ahead of him. Will he side with the the Hedge Fund Cowboys on Wall Street, or the people of Rhode Island?
It remains to be seen. But rest assured, some of us with long memories will be watching.
Russell Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Send him email at [email protected]. Follow him on twitter @russmoore713.
Related Slideshow: RI Public Pension Reform: Wall Street’s License To Steal
See the key findings from Forbes' columnist Edward Siedle, who unveiled his investigative report into the RI pension system, "License to Steal," in October 2013.
"The Employee Retirement System of Rhode Island has secretly agreed to permit hedge fund managers to keep the state pension in the dark regarding how its assets are being invested; to grant mystery hedge fund investors a license to steal, or profit at its expense using inside information; and to engage in potentially illegal nondisclosure practices," said Siedle.
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