Retirees should stay wary of hedge funds

Your Money

May 20, 2007|By Jonathan Peterson | Jonathan Peterson,Los Angeles Times

When the hedge fund Amaranth Advisors LLC flamed out last year after disastrous bets on energy prices, San Diego County's retirement fund was among those burned. Losses to its portfolio were estimated at $100 million.

The episode is unlikely to stem the rising tide of pension dollars into hedge funds. It has, however, raised concerns about the safety of retirement money and stirred debate on whether more oversight is needed.

"Amaranth is a glaring example of the loss that can take place and the risk that exists when public pension systems invest in hedge funds," said Lani Lutar, president of the San Diego Taxpayers Association. "At the end of the day taxpayers could be left holding the bag."

Hedge funds utilize an array of trading techniques to pursue lucrative returns, sometimes shifting strategies with dizzying speed and often using debt to enhance the payoff. Retirement plans, facing burdensome financial obligations in the future, will have nearly $200 billion in these funds by 2010, said Daniel Celeghin, associate director of consulting firm Casey, Quirk & Associates.

This might prod some retirees to keep an eye on how their pension money is being invested and to examine whether new risks are entering the picture. Getting the information might take some effort, however, and some funds make it easier than others.

Big public pension funds typically offer investment information on their Web sites.

Beyond that, public funds also have open board meetings and are subject to freedom of information laws that generally require the disclosure of investment details.

"The way you have input is to engage with the fund board and urge them to be extraordinarily careful," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees. "If there is an active member representative or retiree representative, you should call them up and tell them how you feel."

Private firms have maintained that their liability for pension benefits means that they control the investment decisions. Yet here, too, there are ways to investigate, experts say.

Corporate pension plans lay out investment details on a Form 5500, which is filed annually with the Labor Department. Plan participants can request such information from the agency by calling its public disclosure office at 202-693-8673. There's a time lag, however, so the information might not be up to date.

Details also might be provided in the annual report or summary plan description. And you can call your company or the outside firm hired to administer your plan.

"If you're a retiree, and you want to get an answer, and you want to get an answer without a lot of hassle, the way to maximize your chances is to call - not write - the office of the plan administrator," said Damon Silvers, associate general counsel of the AFL-CIO. "When someone picks up the phone, you say, `I'm a retiree. I have a couple of questions about how the plan is being managed. Is there someone I can talk to?'"

Even if you manage to learn some details about hedge fund investments, it is no simple matter to assess their significance, experts caution. Hedge funds often operate secretively and disclose little. They employ widely diverse strategies, and they vary in risk.

"For many of these funds, lack of transparency is part of the business model - and this is ridiculous," said Stephen Brown, a finance professor at New York University's Stern School of Business.

In February, a Bush administration working group concluded that discipline of the marketplace was sufficient to safeguard investors.

Jonathan Peterson writes for the Los Angeles Times.

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