Thursday, May 25, 2017

How To Steal Millions From CalPERS?

Edward Siedle wrote a comment for Forbes, How To Steal A Lot of Money From CalPERS, The Nation's Largest Public Pension:
How hard would it be to steal millions from CalPERS, the nation’s largest public pension with $320 billion in assets? Easy-peasy.

Yesterday the Wall Street Journal reported a disturbing fact—a fact well known to pension insiders for years. That is, officials at CalPERS do not know the full extent of the fees the pension’s private equity managers take out of the pension.

At a 2015 meeting, the chief operating investment officer openly acknowledged that no one knew the performance fees paid.

Let’s clarify what’s going on here. Presumably the mega-pension knows, or can readily establish, all the fees—asset-based and performance—it pays its money managers pursuant to fee invoices. (A breakdown of other operational fees—which can be significant—can either be gleaned from investment fund financial statements or specifically requested from managers.)

What CalPERS doesn’t know is the performance and other fees its managers take directly from the funds they manage for CalPERS without asking, disclosing or invoicing.

At the same 2015 meeting, the chief operating investment officer admitted, “We can’t track it today.”

CalPERS claims to have turned to “big data” computer models—algorithms—to understand private equity costs. Supposedly, a software program developed by outside firms determined at the end of 2015 that the pension paid $3.4 billion in performance fees over the past quarter-century to private-equity firms. In 2016, that number was said to be $490 million. Don’t believe these figures for a second.

For those who are impressed by opaque algorithms no one understands and that lack effective feedback loops to highlight deficiencies and errors, I suggest reading Cathy O’Neil’s new book, Weapons of Math Destruction.

As an expert in ferreting-out hidden, excessive and illegal investment fees, I would never recommend any pension fiduciary (and certainly not a fiduciary overseeing hundreds of billions in government workers retirement savings) rely upon an ill-defined computer model to catch criminals.

So, to re-cap the problem facing CalPERS: Private equity managers are taking billions from the pension but the pension has no idea how much. How comforting is that to pension stakeholders? You’d think that California’s largest state employee union, SEIU Local 1000 and AFSCME would be concerned about protecting the retirement assets of their members that are participants in the state pension.

Of course, if CalPERS doesn’t know how much money these private equity managers are taking out of the pension, it cannot possibly know whether the amounts taken are legitimate or wrongful—i.e., theft.

In my opinion (and based upon my experience conducting over $1 trillion of pension investigations), it is almost certain some CalPERS private equity managers are, shall we say, misappropriating assets from the retirement system. Recent SEC staff findings confirm my views.

In 2014, SEC staff found that more than half of about 400 private-equity firms it examined had charged unjustified fees and expenses without notifying investors. To be sure, CalPERS conceivably could have adroitly avoided the hoards of private equity wrongdoers but, based upon my knowledge of longstanding CalPERS due diligence lapses and monitoring weaknesses, don’t count on it. As I wrote in 2011, CalPERS involvement in an investment scheme is no assurance of integrity or a “Good Housekeeping Seal of Approval.” 

CalPERS board member JJ Jelincic, who raised the issue of undisclosed fees in the 2015 board meeting mentioned earlier agrees. “We don’t know what fees our private equity managers are taking out of the pension and so we can’t possibly know whether all the fees are legitimate. When I’ve raised the issue, I’ve been told the managers are our “partners” in the funds and we should just trust them.”

I posed the following question to CalPERS today in an email: If CalPERS does not know precisely how much money private equity managers are receiving related to fund assets, how can stakeholders be assured that these managers are not wrongfully taking from the pension?

In response CalPERS said, “Our Private Equity fees are fully disclosed in our Comprehensive Annual Financial Report and in the Private Equity Annual Program Review.”

In my experience dealing with CalPERS, the board regularly claims certainty as to matters which it barely grasps. How long has CalPERS known about potential theft by its managers? At least four years.

On March 22, 2013, I sent a letter to the CalPERS board reciting my credentials (for those board members who did not already know me) and emphatically stating, “It is apparent to me, even from a distance that the fund continues to lack many of the safeguards I would recommend to improve management and performance.” I received no response to the letter.

A few months later, on May 13, 2013, I sent a second letter to board member Jelencic, as requested, providing further detail regarding issues which in my expert opinion should be investigated fully by the pension. Included in these issues were specifically “undisclosed fees related to investment providers/vendors,” and “private equity and hedge fund conflicts of interest, fee abuses and malfeasance.”

I am told that when Mr. Jelencic brought my second letter to the attention of the board at a closed meeting, the Board President responded, “How is this letter different from any of the thousands of others we receive? The suggestion to meet with me was rejected, I am told by Jelencic. CalPERS today stated, “We cannot comment on issues that are discussed in closed session.”

If it’s true that the CalPERS board regularly receives thousands of letters from forensic experts and other credible whistleblowers alleging potential wrongdoing regarding pension investments—allegations of wrongdoing which the board routinely ignores—that’s really scary. Unions protecting government workers should be alarmed that such warnings go unheeded and demand to see all such correspondence.

My advice to would-be criminals: If you want to steal millions, escape detection and prosecution, then set your sights on the mother of all pension honey-pots, CalPERS.
Ted Siedle, the pension proctologist, is at it again, and this time he's setting his sights on CalPERS, the largest and best-known US public pension.

I agree with Ted, it's unacceptable that any large public pension investing billions in private equity can't track all fees and other costs very closely (to the penny). This is a matter of basic accounting, no need for sophisticated algorithms to track these fees (that's just ridiculous).

But CalPERS does fully disclose its private equity fees in its Comprehensive Annual Financial Report and in the Private Equity Annual Program Review.” It has to by law or else its board and senior staff can be convicted of fraud and misappropriation of funds.

What about GPs? I doubt they're doing anything remotely shady in terms of fees. It's simply not worth it for them to risk their relationship with CalPERS or a SEC fine of millions of dollars.

I believe that Ted Siedle is trying to drum up business for himself. He wants to be able to conduct a comprehensive audit on CalPERS, above and beyond the standard financial statements. If so, he should be very upfront of his intentions when writing these articles.

Siedle isn't the only one criticizing CalPERS. In her latest comment, Yves Smith (aka Susan Webber of Aurora Advisors) also attacks CalPERS for keeping its board in the dark on how private equity "subscription line financing" gooses staff and GP pay and systemic risk:
It’s remarkable to see that some private equity general partners, who above all are experts at increasing their own net worths, are concerned about a gimmick that boosts reported private equity fund returns. By contrast, limited partners like CalPERS are in “Nothing to see here” mode on the increase risks and costs, which include being forced to liquidate investments at the worst possible time to pay down these extra private equity borrowings.

The gimmick is subscription lines of credit. They allow private equity fund managers to borrow at the level of the investment fund, in addition to the debt they heap onto the portfolio companies they buy. We had heard of them over two years ago, but didn’t write them up then because they weren’t being used all that much back then.
I will let you read the rest of Yves' comment here as it's long, self-indulgent, somewhat nauseating and very poorly researched and relies on outside experts who frankly don't have a clue of what they're talking about.

Yves does raise good points on transparency and the board's fiduciary duty, but there are some things she claims which are just ridiculous or plain wrong. For example, she ends her comment by stating (added emphasis is mine):
Can Costigan really be completely ignorant, say, the conflict of interest resulting from the consultants being hired by staff and therefore having incentives to keep them happy? Did he miss the entire financial crisis, in which ratings agencies gave overly rosy grades to subprime related credit vehicles because the structures were their clients? Or that ratings agencies are famously slow to issue downgrades because they want to stay on a good footing with their clients? Or that compensation consultants have managed to devise norms that result in ever-escalating pay irrespective of performance?

More specifically, Professor Ludovic Phallippou of Oxford, who specializes in private equity, has pointed out how consultants and academics had been comparing private returns to that of the S&P 500 from the mid 2000s to mid 2010. In the last two years, MSCI World has become the preferred point of reference. Why? Because the S&P 500 has been doing very well over the last three years, unlike the MSCI World index. And Sam Sutton, a private equity reporter at Buyouts Magazine, told me it was intriguing to see that CalPERS’ consultant CEM Benchmarking has wound up scoring every public pension fund client he’s written about as having above average performance, which would seem to be mathematically impossible until you allow for artful selection of peer groups.

As we reported in 2015, we caught CalPERS’ private equity consultant PCA trying to implement an absolute return for CalPERS and CalSTRS, which essentially meant ignoring the risks of private equity in looking at its returns. As we explained at the time on this site and at Bloomberg, this was not completely bogus analytically and intellectually, but would also throw the idea of risk measurement out the window. No finance academic would back this approach.

The only thing that stopped this scheme from being implemented on a stealth basis was an op ed in Sacramento Bee by private equity expert Eileen Appelbaum.

Costigan is either so clueless or so inattentive that he missed this sorry episode. There was no benefit whatsoever to retirees or system health to this proposed change. The benefits would accrue solely to staff, in terms of much more favorable bonus targets and greater ability to spin CalPERS performance as adequate. Mind you, there are other examples of staff playing fast and loose with numbers, like the one we wrote up yesterday, but this one was outrageous.

Moreover, Costigan admits staff has motive to seek more pay…they make less than their peers! And then he argues that because consultants back staff recommendations, that there is nothing to worry about.

Of course, since the board sat pat when CEO Anne Stausboll gave Chief Investment Officer Ted Eliopoulos a $135,000 gift via a bonus that violated his bonus formula by paying for non-performance, perhaps Costigan has a point. Senior staff gets paid for performance whether they deliver or not, so why would they need to play games?
So where did Yves go wrong in her flimsy and overly critical analysis? Well, just from the points I underlined, I can tell you she and the professor she cites are wrong.

The switch from using the S&P 500 to using MSCI World is a reflection of the global shift in the private equity portfolio, not because the latter is easier to beat.

Second, some consultants claim that having an absolute return benchmark is in line with meeting the actuarial target rate of return. In other words, there is a logic to using absolute return benchmarks in private markets but there are risks too.

What risks? In any given year, you can substantially underperform an absolute return benchmark if markets are getting clobbered and you need to value down your PE holdings (I've seen this plenty of times). Conversely, you can significantly outperform this benchmark when markets are soaring (seen this plenty of times too).

This is why many experts prefer a public market index and spread (to reflect illiquidity risk and leverage) when trying to benchmark private equity.

In the good old days when private equity funds were killing it in terms of performance, they would easily beat the S&P 500 + 300 basis points benchmark over a very long period.

But as more and more investors shift assets into private equity, the opportunity set is much smaller, so the spread has been reduced to 150 basis point or even less over the appropriate public market stock index.

Importantly, benchmarking private market assets isn't as easy as Yves and her professors think and I'm surprised they haven't taken the time to look at the value-added these programs have created at CalPERS and elsewhere over a 10 or 20-year period.

If you read Yves' comments, you will think that CalPERS board is totally incompetent and the senior executives are pulling wool over their eyes to "goose their pay."

This is total nonsense but I blame the governance structure at these large funds. Where is California's state Treasurer? Why isn't some auditor general performing a comprehensive risk, investment, operational, and performance due diligence of CalPERS and making the findings public?

Admittedly, such a comprehensive audit requires expertise and very few firms have the resources and knowledge to complete such a huge undertaking but as long as CalPERS stays quiet, people like Yves and Ted Siedle will be all over them, claiming incompetence, negligence, and even outright fraud.

[Note: CalPERS should hire my friends over at Phocion Investments, fly them over to Sacramento for three months and let them conduct an intense audit, especially performance audit. CalPERS will never do it but trust me, it will be the best bang for their buck ever as my friends have all worked at large pensions and they really know their stuff.]

But the problems at CalPERS keep mounting and it has become a PR nightmare. J.J Jelincic, an outspoken member of the CalPERS Board of Administration is not seeking re-election, setting up a wide-open race to succeed him:
Jelincic, an eight-year incumbent and CalPERS investment officer, told the pension fund in late March that he planned to run for another term.

But, he did not file paperwork to run by this week’s deadline. He posted a message on his website saying he would not be on the ballot.

Jelincic’s message further urged voters to press candidates for more information about CalPERS’ investment strategies. He did not return a phone call from The Bee by deadline.

“I originally ran for the CalPERS board because I thought the board was not doing its job and was too often being manipulated by staff. After eight years on the board, I can tell you it was even worse than I realized,” he wrote.

Three candidates have filed paperwork to run for Jelincic’s seat. They are State Personnel Board member Richard Costigan, state scientist David Miller, and Long Beach Unified School District member Felton Williams.

Costigan sits on the CalPERS board as an appointee from the State Personnel Board. He’s was a legislative affairs secretary and deputy chief of staff to Gov. Arnold Schwarzenegger.

He said he wanted to run for a four-year term on the CalPERS board because it would give him “more certainty” in his role on the board. His appointment from the Personnel Board must be approved every year.

Because Jelincic is not running for re-election, CalPERS is extending the candidate filing deadline for his seat. It is scheduled to close on May 30.

Michael Bilbrey, another incumbent, is seeking re-election. He’s facing challenges from Margaret Brown, the director of facilities at the Garden Grove Unified School District; Bruce Jennings, a retired legislative consultant in the Capitol; and Wisam Altowaiji, a retired city engineer for Redondo Beach.

CalPERS members will start receiving ballots for the election in September. Ballots will be counted in October.

The CalPERS board has 13 members. Some are elected by public employees and retirees, others are appointed by the governor and two are statewide elected officials.
I must say, I'm sorry to see J.J. Jelincic leave the Board as he has investment experience and asked a lot of important questions (which fell on deaf ears). More worrisome, he posted a very critical message on his website, basically saying CalPERS Board is incompetent:
My term ends in January 2018. I have decided not to run for re-election.

I originally ran for the CalPERS Board because I thought the Board was not doing its job and was too often being manipulated by staff. After eight years on the Board, I can tell you it was even worse than I realized.

I have tried my best to improve the situation, and I think I have helped do that. But in the process, I have angered some senior management and fellow Board members who are invested in the status quo. It is clear to me that this Board has abdicated its responsibilities to challenge, monitor and supervise the staff.

The CalPERS Board is responsible for managing trust funds--other people’s money--but has allowed staff to fail to properly track costs. We have given staff permission to withhold information from the Board and allowed them to have exclusive control of the information given to the Board. The Board routinely rubber-stamps staff’s recommendations without examining alternatives or the implications of those decisions.

The Board recently changed asset allocations. Why? Secret! What factors were considered? Secret! What costs were evaluated? Secret! Was the impact on beneficiaries and employers considered? Secret!

Why should Board members know or care? Because they are fiduciaries who have an obligation to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.” (from the California State Constitution) Would you hire someone to manage your money if they couldn’t tell you what they are doing or why? I invite you to ask any Board member to identify the investment strategy within any asset class.

A new election is coming up. Please look closely at the candidates. I encourage all of you to hold the Board to a higher standard. Demand real engagement. Demand real transparency. Demand real accountability.

I thank all of you for your support over the years.
After reading this, it raised my concerns that CalPERS Board isn't fulfilling its fiduciary duty. It also demonstrates why the governance at Canada's large public pensions is infinitely better than that of US public pensions. Board members at large Canadian public pensions are independent and highly qualified, they are nominated for a term and they are held accountable for these pensions.

I guarantee you that this nonsense would never fly at a board meeting at Canada's large pensions. How do I know? I've sat in on board meetings at PSP Investments when I worked there and every single board member asked good questions and was highly engaged in every aspect of that pension.

The same goes for other large Canadian pensions. The Board meetings at CalPERS are public (most, not all) and I'll give them that much, but sometimes I cringe listening to these board members and I was particularly appalled at how they treated J.J. Jelincic (see this article for more of a background).

Now, I don't know J.J. from a hole in the wall, have only exchanged one brief email with him, so I don't know everything that is going on with him and his interactions with other board members.

Dave Hart wrote a particularly nasty comment about him at the end of this article above:
It is not a sad day for Californians. J.J. went out of his way to create a wall between himself and the rest of the Board.  His comments referred to in the article are assertions that are impossible to verify and are very much "Trumpian": bombastic without any backup and do nobody any good. As a CalPERS employee, he was off work at full pay for the last 8 years and very much enjoyed being the bomb-thrower.  He failed to use his time in office to develop an articulate position of specifically what needed to be changed and made no attempt to find allies in or outside the CalPERS Board to make such changes. I wonder if his decision to not seek reelection coincides with his decision to retire from state service. In any case, his departure will not hurt CalPERS.  J.J. had the capacity to do a lot of good, but his ego took the front row. How do I know this?  I worked along side him as the chair of an allied bargaining unit for five years and got to know his good side as well as the not so good.  If the the BEE is going to print an article and repeat allegations they need to do more investigation to see if there is any there.
Obviously, J.J. has few friends on CalPERS's board and investment staff but I think he did his job as best as possible given the circumstances (when you're one against the rest of the board, you're basically a dead man walking).

Anyway, enough on that. In other interesting news, aiCIO reports that California Gov. Jerry Brown’s recently revised state budget proposes a $6 billion supplemental payment to CalPERS, which he says will save the state $11 billion over the next two decades:
The supplemental payment effectively doubles the state’s annual payment. It is intended to ease the effect of increasing pension contributions due to the state’s unfunded liabilities and the CalPERS Board’s recent decision to lower its assumed investment rate of return to 7% from 7.5%.

California currently has $282 billion in long‑term costs, debts, and liabilities; $279 billion are related to retirement costs of state and University of California employees, according to the revised budget.

“These retirement liabilities have grown by $51 billion in the last year alone due to poor investment returns, and the adoption of more realistic assumptions about future earnings,” said Brown in his budget.

As of June 30, 2016, CalPERS was only 65% funded, and reported unfunded liabilities of $59.5 billion. According to the revised budget, without the supplemental pension payment, the state’s contributions to CalPERS are on pace to nearly double by fiscal year 2023‑24. However, the additional $6 billion will reduce the unfunded liability, and help lower and stabilize the state’s annual contributions through 2037‑2038, assuming there are no changes to CalPERS’ actuarial assumptions.

According to the budget, contribution rates as a percent of payroll will be approximately 2.1 percentage points lower on average than the currently scheduled rates. For example, peak rates would drop from 38.4% to 35.7% for state miscellaneous (non‑safety) workers, and peak rates would drop from 69 percent to 63.9 percent for CHP officers.

The funding for the supplemental payment will be paid through a loan from the Surplus Money Investment Fund. Although the loan will incur interest costs of approximately $1 billion over the life of the loan, actuarial calculations indicate that the additional pension payment will lead to net savings of $11 billion over the next 20 years.

For 2017‑18, the state’s contribution to CalPERS is estimated at $5.8 billion ($3.4 billion General Fund). Without the supplemental payment, Brown says that the state’s contribution is estimated to reach $9.2 billion by 2023‑24, due to anticipated payroll growth, and the lower assumed rate of return. However, with the supplemental payment, the state’s 2023‑24 pension costs are projected to be $8.6 billion.
Lastly, John Moorlach, a state senator, wrote a comment that was republished on USA Today, Here's why Brown's plan to prepay CalPERS is smart:
Gov. Brown wants to prepay the California Public Employees Retirement System with $6 billion beyond what most had expected.

The source of the funds is the Surplus Money Investment Fund. Don’t ask me why a state with a $169 billion unrestricted net deficit has some $50 billion in a low interest bearing account with such an odd title. Perhaps the University of California Chancellor can explain how her system and the state can better pull these things off?

Also, don’t ask me why the timing is so odd. The Legislature just approved an annual $5.2 billion gas and auto tax increase, and now the governor has $6 billion for non-road repair expenditures?

Despite these concerns and anxieties, I like the proposal. It’s about time that the governor got serious about the state’s spiraling unfunded defined benefit liabilities, but, I would postulate that this proposal needs a little more sizzle to make it an even more interesting opportunity.

Let’s address the cash flow components of this idea. The state currently has funds that are earning less than 1 percent per year. Paying down a 7.5 percent loan would provide a bigger bang for the buck. The spread of more than 6.5 percent will provide significant savings to the state’s general fund.

It’s true that whatever is deposited into a defined benefit pension plan by a plan sponsor is irretrievable. That is, it’s not a loan to CalPERS, it’s a payment. Once it goes in, the state cannot ask for it back. But, this will be a prepayment. Consequently, should the state have a cash flow emergency, it could simply stop making the regularly scheduled payments into CalPERS and slowly accumulate back this advancement.

The upside? The state gets to pay down its liabilities sooner, which will have the potential of reducing the annual required contributions in future years. The state obtains the 6.5 percent spread in savings. CalPERS can allocate the funding to meet its own cash flow needs and reduce transaction costs by doing it in bulk. The state wins. The taxpayers will win. And CalPERS wins.

What could go wrong? Ask former New Jersey Gov. Christine Todd Whitman. In 1997, she issued $3.4 billion in pension obligation bonds. This is a risky technique that converts a soft debt to the pension system into a hard debt to bondholders.

The idea is similar to Brown’s proposal, in that the cost of the money is cheaper than the current 7.5 percent investment assumption rate of the plan. In the late 1990s, this may have been a brilliant move. But, when the “” boom turned to bust, pension plans lost a significant amount of plan funds invested in the internet-related industries.

The big risk the governor will have to face is the possibility that the investment markets may tank after making the contribution prepayment. Remember, if you lose 50 percent on your investments this year, you have to earn 100 percent next year just to break even on your principal.

It’s not a good idea to time the market. It’s better to dollar-cost average, which means investing the same amount at regular intervals over time.

We cannot see the future. It’s obvious that CalPERS cannot, based on its recent repositioning out of certain equity markets last September, which has cost it more than $900 million in lost appreciation.

Had Brown recommended this prepayment move last year, he would be a hero right now.

To make the proposal more interesting, Brown should ask the Board of CalPERS what type of incentive it will give the state for the prepayment. CalPERS will benefit from the large influx and should provide at least a 3.75 percent reduction on the actuarially calculated required contribution. This would provide a $225 million savings to the state, using the $6 billion figure, thus providing some sizzle.

Investing is not difficult, but it is also not for the faint of heart. You have to live with your decisions. Trust me, I managed a $7 billion portfolio and sat on the board of one of the nation’s largest public employee pension systems.

While serving as the Treasurer of Orange County, I assisted in constructing a prepayment vehicle for the pension system. Instead of 26 regular payments during the year on biweekly pay days, the county paid the full amount up front, less the negotiated incentive. The county borrowed the funds, at an interest rate lower than the investment assumption rate of the retirement system and has realized some $100 million in net present value savings over the last 11 years.

How did the county do with its investments over this time period, with the change in the regular payment intervals? It actually out-performed what would have occurred under the normal protocol.

We should always remember that past performance is not an assurance that future performance will be the same or better. But, prepaying CalPERS’s massive obligations is something that should be strongly encouraged. Pension plan debt is an expensive liability in the current low-interest rate environment. Consequently, public employee retirement stakeholders should enter into a good debate on this proposal.
Excellent comment and I agree with his views on the contribution prepayment but fear markets will tank in the near future and this will throw a wrench in this proposal.

Below, I embedded Part 1 of CalPERS's recent Investment Committee. You can view all five parts here. As always, if you have anything to add, feel free to reach me at

Wednesday, May 24, 2017

The Big Squeeze?

James Kwak of The Baseline Scenario wrote a comment on how Fees Add Up:
Public pension funds are having a tough time. On the one hand, the average funding ratio (assets as a percentage of the present value of future obligations) is below 80% because of inadequate contributions by sponsors (states and municipalities) and poor investment returns since the collapse of the technology bubble in 2000. On the other hand, because pensions responded to low returns by shifting more of their money into hedge funds and private equity funds, a larger proportion of their assets is siphoned off as investment fees each year.

Unlike some people, I am not against hedge funds and private equity funds in principle. I think it’s highly likely that there are people who can beat the market on a sustained basis—particularly if they are people who are especially good with computers—both for theoretical reasons (someone has to be the first person to discover each relevant piece of information or actionable pattern) and empirical reasons (see Fama and French 2010, for example). Hedge funds have lagged the stock market in recent years, but what critics sometimes overlook is that they are supposed to trail the market in boom periods, because many target a beta of around 0.5. But I am mystified by the fact that, in what is supposed to be a highly competitive and innovative industry, the price of investing in a hedge fund has stayed virtually fixed at 2-and-20 (2% of assets, plus 20% of investment returns) for decades.

The consequences of these high prices are added up in The Big Squeeze, a new report sponsored by the American Federation of Teachers. Because true investment fees are usually not disclosed—fund managers insist that they are confidential and require investors not to divulge them—the report simply quantifies the potential savings from reducing fees from 1.8-and-18 to 0.9-and-9. This may seem arbitrary, but I know anecdotally that some funds, even big ones, are charging something like 1-and-10 even to ordinary investors. Since state pension funds are some of the biggest investors that exist, you would think they would be able to negotiate even lower fees.

Not surprisingly, the numbers involved add up quickly. Lower fees over the past five years would have saved the average pension fund included in the study $1.6 billion; to put things in perspective, it would have improved the aggregate funding ratio for these funds by more than two percentage points, which is nothing to sneeze at.

The important question is why high fees persist despite the potential market power of big pension funds. There are probably multiple explanations. One is a culture of secrecy, which makes it difficult for any fund to find out what other funds are paying. Another is the marketing prowess of fund managers, who are adept at explaining whey their fund is unlike any other in the world and therefore merits its high fees. A third is that pension fund managers are playing with other people’s money (in this case, the other people are the fund’s beneficiaries—teachers, firefighters, and other government employees)—and may be more interested in ingratiating themselves with the asset management industry than with getting the best deal they can. (This is even more likely the case for the investment consultants who match pension funds with asset managers.)
But in a political climate that makes tax increases on rich fund managers unlikely, state governments could achieve the same results by taking a harder line on investment management fees: requiring public disclosure of all fees or even imposing hard fee caps for pension fund investments. With the amount of money involved, it’s hard to imagine that major pension funds couldn’t find anyone competent to take their money for 0.9-and-9.
Let me thank Suzanne Bishopric for sending me this comment.

The Big Squeeze on US public pensions has been going on for decades and it was only a matter of time before someone shined a light on the huge fees being doled out to alternative investment managers, many of which are charging hefty fees for mediocre long-term results.

The first thing I will tell you is to take the time to read the entire report by the American Federation of Teachers. The Big Squeeze is available here and covers a lot of material, including popular myths surrounding the pension crisis and who (it claims) has really benefitted from shifting state pensions' asset mix more into alternative investments.

In her article, Strapped Pension Funds, and the Hefty Investment Fees They Pay, Gretchen Morgenson of the New York Times begins by asking: "Where are the pensioners' yachts?"

Great question. The truth is a select few hedge fund and private equity titans have greatly benefitted from this shift into alternative assets, amassing extraordinary wealth, while US public pension funds keep sinking deeper into a pension albatross, failing to deliver on these and other investments.

Still, despite this reality, US pensions are rushing to invest more into alternatives, fearing a big downturn ahead. It's a total catch-22, damned if you do, damned if you don't.

But as I've warned, the pension storm is here and gathering steam, so no matter how much US public pensions invest in alternatives, it won't make a big difference in terms of their funded status which will inexorably get worse as rates decline to new secular lows.

No doubt, the big squeeze is troubling, but it's important to understand that it's a byproduct of terrible pension governance which basically forces US public pensions to farm out a big chunk of their pension assets to external managers that charge them hefty fees.

The problem isn't paying fees when risk-adjusted performance is met. The problem is paying big fees for subpar or average returns in a low-return environment over a long period as your pension deficit gets worse.

Importantly, in a deflationary world, all those fees add up fast, impinging on the net performance of these external managers and this certainly doesn't help chronically underfunded pensions, many of which still cling to unrealistic return targets.

Very few public pensions were raising a big stink on fees when rates were much higher, performance was decent and their funded status was fully funded or close enough to fully funded status. A little inflation also helped justify these fees.

But in a low yield, low return deflationary world, costs matter a lot more and pensions are focusing on lowering operating costs across the board, including on the fees they pay to external managers.

Of course, we need to be realistic here. Some external managers have delivered great long-term results and therefore have a lot more clout than others. You're not going to go to Blackstone, Bridgewater, or any other brand name fund and dictate the terms of the deal. It's not going to happen because if they make one exception, they need to make it for all their investors which signed a most favored nation clause.

The other thing I'd like to bring to your attention is that a solid case can be made to increase the exposure to alternative, illiquid investments, especially if you can co-invest on bigger deals alongside your external partners to lower the overall fees.

This has been the driving force behind the success of Canada's large public pensions, otherwise known as the mighty PE investors. Where they can, Canadian pensions will invest directly and where they can't, they will invest with external partners and engage in co-investments to lower fees.

However, in order to do this, they implemented world class governance allowing them to operate at arms-length from the government. This allows them to compensate their pension managers properly in order to attract and retain talented individuals who are able to do direct deals independently or (as is more often the case) by co-investing alongside external partners.

More direct investments (either independently or through co-investments) allows Canada's large pensions to lower overall fees of their private equity program.

In the US, there is way too much political interference in public pensions and the results are they cannot pay their public pension fund managers properly to do what their Canadian counterparts do.

Then, one day, the American Federation of Teachers puts out a report highlighting The Big Squeeze, and all of a sudden teachers, police officers and other public-sector workers wake up to the reality that everyone is milking their public pension dry. And by the time they're done milking these pensions, there will be little left to pay the benefits that were promised to them.

I'm being very cynical but there is a lot of truth in the report the teachers put out. If their pensions are doling out huge fees to alternative investment managers, they have a right to know what they're getting in return for all those fees.

Having said this, I want to be balanced here because I maintain the view that good performance is worth paying for. Chronically underfunded US pensions with unrealistic return targets can't expect to make their target rate of return simply by investing in index funds. They need to invest in top-tier managers in the alternatives space to add value over and above their public market benchmarks.

The problem then becomes identifying top-performing external managers and seeing who is worth paying all those fees to. And that isn't as easy as it sounds which is why most pensions use consultants which all tend to recommend the same brand name funds.

Therein lies the structural problem. The top alternatives managers carry enormous clout, and they, not the big institutional investors that invest in them, dictate the terms. Unless the big funds turn around and agree that from now on, 1 and 10 is the new norm, it's never going to happen. And since those chronically underfunded US pensions need these top funds to attain their unrealistic bogeys, everyone stays silent, quietly complaining among themselves.

Anyway, take the time to read The Big Squeeze and let me know what you think via email (

I will caution everyone, however, to read these reports with a critical eye. If you talk to the pension fund managers at CalPERS, CalSTRS, and other large US pensions, they will tell you private equity is one of the best performing asset classes over a long period, net of all fees. And they're right.

But clearly, we have come to a crossroad on fees paid to alternative investment managers. Last Friday, I went over top funds' Q1 activity, where I stated this:
Bill Ackman who got killed on Valeant Pharmaceuticals just came out to say 2-and-20 doesn’t work anymore for hedge funds. In an effort to garner support from institutional investors fed up with his lousy performance, his fund adjusted its fee structure last year so that clients only pay on profits in excess of 5 percent (a noble move but pretty much a marketing ploy after suffering terrible losses).

The only hedge funds that are delivering consistent returns in these markets are quant funds taking over this world. This is why they're once again at the very top of alpha's rich list.
I will give it to Bill Ackman, at least he gets it from an institutional investor's perspective. Did he do this to stop the hemorrhaging and garner more assets? No doubt, but maybe he's realizing what everyone else already knows, 2 and 20 is dead and is becoming increasingly harder to justify in a low yield, low-return deflationary world.

One final thought, it's very fashionable these days to blame everything on greedy bankers, hedge fund managers, and private equity managers, but from my vantage point, there is plenty of blame to go around when it comes to America's pension crisis. Unions, state and local governments and Wall Street all have unrealistic expectations on return targets, benefits, contribution rates, risk-sharing, and fees.

In the meantime, the pension storm cometh, and unless all these stakeholders come together to figure out a real long-term solution to this crisis, things will only get worse.

On that note, take the time to watch the clips I embedded at the end of my last comment on Ontario easing its pension funding rules. In particular, Ron Mock, OTPP's CEO, being interviewed on CNBC recently discussing their long-term outlook on investing in a changing world.

Below, Robert Shiller, professor of economics at Yale University, explains his call that the markets could go 50% from here and bonds are dangerous here. CNBC's Jim Cramer weighs in.

I respectfully disagree with professor Shiller, especially on bonds. Sure, stocks can continue levitating up as the big beta bubble expands. But when the next crisis hits, and it will, stocks will get clobbered and government bonds will rally like crazy from these levels.

Of course, for chronically underfunded pensions, nothing would be better than stocks going up 50% from here and bond yields soaring (so liabilities decline considerably). Who knows, maybe it will happen, giving these underfunded pensions suffering from the big squeeze some much-needed breathing room.

I just think this is wishful and dangerous thinking because if the opposite happens, a lot of these chronically underfunded US public pensions are in for a rude awakening or something far worse.

Tuesday, May 23, 2017

Ontario Eases Rules For Pension Funding?

Justin Giovannetti of The Globe and Mail reports, Ontario plans to ease rules for pension plan funding:
Ontario is planning to ease the rules around how some pensions are funded and how officials judge the long-term health of those plans.

The changes would affect how defined benefit plans provided by single employers are funded in Ontario and would reduce the amount of money that they need to invest in plans that are currently undercapitalized. The expected legislation follows a decade of low interest rates and poor returns in which the provincial government has twice been required to help private-sector plans that have failed strength tests.

The new rules, unveiled by the Finance Ministry on Friday, would reduce the solvency funding requirement.

The requirement is a stress test where a pension fund needs to calculate how much would be available in the plan immediately to meet all future obligations. Plans that currently can’t pay 100 per cent of obligations need to make special payments over five years to fully capitalize a plan. Officials say they will now allow plans to have only enough to cover 85 cents for every dollar owed in the future.

Plans that are capitalized over the 85-per-cent threshold would get immediate relief from payments when the legislation takes effect, expected in the 2018 election year. Struggling plans that are financed below 85 per cent would need to pay only up to the new benchmark, making it easier and faster for them to pass the solvency test.

“Everyone deserves a secure retirement. By providing more flexibility, defined benefit pension plans will remain a vital part of our retirement income system in Ontario,” Finance Minister Charles Sousa said in a statement released by his office.

The changes, which cover about one million current and future retirees, won’t affect the benefits that will be paid. While the shift will touch large plans covered by a single employer, pension giants such as the Ontario Teachers’ Pension Plan will be unaffected by the changes.

But Corey Vermey, the director of pensions for Unifor, said that the government did not provide enough for retirees facing an uncertain future if their plans lack funds.

“A single-employer defined benefit pension plan has become a very leaky boat in the sea of pension plans. The risk of insolvency is real to you as a retiree. We think that the balance should be to a view of enhancing a retiree’s benefit as opposed to offering a lesser obligation to the employer,” Mr. Vermey said.

But Toronto’s St. Michael’s Hospital welcomed the news: “Money we were going to have to put aside to meet pension solvency obligations now can be invested in patient care,” the hospital said in a tweet.

To balance the relief, the government will increase the requirements of a second test pension plans must undergo. Pensions must prove they have enough money to fund all current obligations under something known as the “going concern” test. If they fail that test, the plans currently have 15 years to get back to full funding, but Mr. Sousa’s office would cut that back to only 10 years.

As the number of retirees continues to increase in future years and fewer young workers are added, some plans could struggle to return to 100-per-cent funding. Many large employers in Ontario have moved away in recent years from defined benefit plans, which commit employers to providing employees with a certain monthly payment in retirement. Many young workers are now on defined contribution plans, where employers pledge only to invest a certain amount.

The government’s plan will also increase the maximum guaranteed payment a retiree can get from the province’s Pension Benefits Guarantee Fund, from $1,000 a month to $1,500 a month. The fund, which is financed through employer contributions, exists to help retirees in case a company falters into bankruptcy with an underfunded plan. The fund tops up an employee’s pension when it falls short. Employer contributions will rise to cover the increase.

The average private-sector pension in Ontario is $1,300 a month.
Rob Ferguson of The Toronto Star also reports, Ontario to relax solvency rules for ‘defined benefit’ pensions plans:
Employers feeling the pinch of funding defined benefit pension plans for their staff are getting a break that will result in “huge cost savings,” the Ontario Chamber of Commerce says.

The provincial government is relaxing the rules so that single-employer plans will no longer have to meet the most strict solvency tests, Finance Minister Charles Sousa announced Friday.

Legislation will be introduced in the fall.

St. Michael’s Hospital welcomed the move, which many private and public sector employers had been urging the government to make.

“Money we were going to have to put aside to meet pension solvency obligations now can be invested in patient care,” the downtown health care institution said on its Twitter feed.

The change is intended to make it easier for companies in the private and broader public sectors to maintain defined benefit pension plans, which guarantee a set level of retirement income.

“By providing more flexibility, defined benefit plans will remain a vital part of our retirement income system in Ontario,” Sousa said in a statement.

“With these changes, we are also ensuring that pension plans are affordable for businesses and benefit security for workers and retirees is protected.”

He added “there will be no impact on the pensions that retirees now receive.”

Defined benefit plans have long been prized because of the predictability they provide workers, but have been under pressure because of high costs resulting from low interest rates and longer life spans for retirees.

Some employers have switched to less expensive “defined contribution” plans, which don’t provide guaranteed levels of income in retirement and depend more heavily on fluctuating market returns.

“Today’s announcement is a positive development that will go a long way in preserving single employer DB (defined benefit) plans, in enhancing competitiveness for Ontario companies and preserving jobs,” said the lobby group Canadian Manufacturers and Exporters.

“It will level the playing field with the U.S. that doesn’t have solvency requirements and Quebec that eliminated solvency funding altogether.”

The solvency test in Ontario required defined benefit pension plans be 100 per cent funded so that, if the plan were to be wound up, there is enough money, given expected investment returns, to meet all future obligations to retirees and current members.

Employers whose plans fell below the 100-per-cent mark had five years to make booster payments to return to that level, often resulting in “excessive and volatile contributions,” the manufacturers’ group said.

Under the new rules, defined benefit pension plans will have to be funded to 85 per cent of solvency to meet the (“going concern”) test of paying out current obligations, but will also have to fund a reserve to offset any risks they could fall short.

Consultations will be held in the coming months to determine the appropriate size for those reserves, finance ministry officials said.

In another measure to offset the risk of easing the solvency test, monthly guarantees from the province’s Pensions Benefit Guarantee Fund will be increased by $500 monthly to $1,500 to eligible workers in the event a defined benefits plan fails.

About one million Ontarians are members of defined benefit pension plans, which provide regular payments in retirement based on length of service and salary levels.

The changes do not apply to jointly sponsored plans such as the pension plan for Ontario teachers or to multi-employer plans in the skilled trades, often sponsored by unions.
The problem in Ontario isn't with jointly sponsored plans. Ontario Teachers' is fully funded and doing well. OPTrust is fully funded and changing the conversation to focus primarily on funded status. HOOPP is super funded and in the best position of any Canadian pension plan.

Even OMERS has done a great job improving its funded status in the last few years and for all intensive purposes, is fully funded in my book (94% funded status is excellent).

Now, as an aside, the key difference between Ontario Teachers' and HOOPP relative to OPTrust and OMERS is in the form of risk-sharing. The latter two plans guarantee inflation protection, which means no matter what, they never reduce benefits to their beneficiaries.

OTPP and HOOPP have both partially or fully cut inflation protection (otherwise known as cost-of-living adjustments or COLA) when their plans have experienced a deficit in the past. This has been a very useful mechanism to allow them to become fully funded again (watch this OTPP clip to understand why).

OPTrust and OMERS guarantee inflation protection so they have a harder job attaining an maintaining a fully funded status which in my view isn't right (their members need to share the risk of the plan more if they run into trouble).

Still, there's no denying that the problems at Ontario's DB plans aren't with OTPP, HOOPP, OPTrust, OMERS or even CAAT which is also fully funded and has a 50/50 shared risk model.

The problem lies with private-sector DB pensions that are either poorly managed or that don't have the flexibility to address their (going concern) pension deficits. And a lot of these pensions are going to get whacked hard in the near future as rates decline to a new secular low (as the US economy slows).

In this regard, I agree with these new rules to give these private DB plans some more breathing room. Imposing a 100% fully funded status is overly harsh in my opinion.

But I will share something else with you, I firmly believe private companies should not be managing pensions. I would rather see CPPIB or another large public sector entity with great governance responsible for managing the pensions of millions of Ontario workers, backed by the full faith and credit of the province (which admittedly isn't much these days).

Last November, I talked about Ontario's new pension chief, Bert Clark, and the creation of the Investment Management Corporation of Ontario (IMCO). The Government of Ontario mentioned it in its budget recently but we haven't heard much on this entity.

If it were up to me, I would force all large private DB plans to shift their pensions to this new organization and have them managed there and backed up by the province. I don't know why in 2017 we still need private pensions, especially in Ontario where there are a lot of talented pension fund managers.

I understand, the logistics and politics of such a huge undertaking aren't easy, not to mention it might not be legal to do so, but that's too bad because it would be in everyone's best interests, including Ontario's taxpayers.

Below, a couple of clips from OTPP which explain how inflation protection keeps their members' pension in tune and plan from missing a beat.

Also, Ron Mock, OTPP's CEO, was interviewed on CNBC recently discussing their long-term outlook on investing in a changing world. Watch the clips below, very interesting insights (I embedded the full interview clips that are available on OTPP's website here).

Friday, May 19, 2017

Top Funds' Activity in Q1 2017

David Randall and Svea Herbst-Bayliss of Reuters report, Large hedge funds moved out of financial stocks in first quarter:
Several big-name hedge fund investors trimmed their stakes in financial companies in the first quarter as hopes for immediate tax cuts and loosening of regulations after President Donald Trump’s victory in November began to fade.

Boston-based Adage Capital Management cut its position in Wells Fargo & Co, which has come under fire for its sales practices, by 3.9 million shares, according to regulatory filings, while John Burbank’s Passport Capital cut its stake in the company by 947,000 shares.

Third Point cut its stake in JPMorgan Chase & Co by 28 percent, to 3.75 million shares, while Suvretta Capital Management sold all of its shares of Morgan Stanley, JPMorgan Chase and Citigroup Inc.

Overall, financial companies in the S&P 500 were up 2.1 percent in the first quarter, compared with 5.5 percent for the index as a whole. Financials significantly outperformed the broad market following Trump's Nov. 8 election.

Trump had pledged to do a "big number" on the landmark Dodd-Frank financial reform law, which raised banks’ capital requirements and restricted their ability to make speculative bets with customers’ money. The Treasury Department is still filling vacancies and will not be able to complete a review of the law by Trump’s June deadline, sources told Reuters.

Quarterly disclosures of hedge fund managers' stock holdings, in what are known as 13F filings with the U.S. Securities and Exchange Commission, are one of the few public ways of tracking what the managers are selling and buying. But relying on the filings to develop an investment strategy comes with some risk because the disclosures come out 45 days after the end of each quarter and may not reflect current positions.

Bank of America Corp was one of the few large banks to gain favor among hedge fund investors in the first quarter. David Tepper’s Appaloosa Management took a new stake in the company, buying 8.7 million shares, while Dan Och’s Och-Ziff Capital Management added 12.78 million shares, increasing its position by 156 percent.

Separately, several hedge fund managers added new positions in media companies. Tiger Global bought 429,000 shares of Netflix Inc. Shares of Netflix are up 29.2 percent for the year. Omega Advisors, which is facing a U.S. Securities Exchange Commission insider trading case, added positions in Netflix, AMC Networks Inc and Sinclair Broadcast Group Inc.

Tiger did, however, halve its position in Google parent Alphabet Inc, whose shares are up 21 percent since Jan. 1.
Brandon Kochkodin and Sabrina Willmer also report, Here's Where Hedge Funds Invested in the First Quarter:
The favorite new bets by hedge funds ranged from the predictable Facebook Inc. to the less known VCA Inc., a pet-service provider.

Many companies attracting the most hedge fund money in the first quarter have either agreed to deals or closed them. Dow Chemical’s $78 billion merger with DuPont Co. is expected to close in August. Liberty Media Corp. purchased Formula 1 in January, Mead Johnson Nutrition Co. agreed to buy Reckitt Benckiser Group during the first quarter, and T-Mobile US Inc. has been in preliminary talks to merge with Sprint Corp.

Hedge funds also showered love on new media, Snap Inc., whose shares have been on a roller coaster, and the old, Time Warner Inc. What’s more, managers applauded the planned shakeup at railroad CSX Corp., and are relieved that the Trump administration’s efforts to build a wall at the border with Mexico, from where Constellation Brands Inc. imports much of its beer, has stalled (click on image).

Jeff Cox of CNBC also reports, Hedge funds have been selling big winners this year:
Hedge fund managers' most popular stock to start the year has been a familiar name that is falling short in terms of performance, while the least popular companies all have been crushing the market.

Procter & Gamble pulled in nearly $2.7 billion in hedge fund cash during the first quarter, nearly double the next most popular stock, according to figures released this week from S&P Global Market Intelligence.

Nelson Peltz's Trian Management was solely responsible for the gush of interest thanks to the $3.5 billion stake it took in the company back in February. Otherwise, P&G actually saw outflows.

The huge flows came even though the company has fallen short compared with the broader market. P&G shares are up just 2.9 percent year to date. The stock did outperform in the first quarter, gaining 6.4 percent to the S&P 500's 4.6 percent, but has fallen off lately.

Shares also outperformed the broader consumer staples sector in Q1 but have fallen behind in that regard as well.

Other hedge fund favorites during the first quarter were Praxair and Marriott International ($1.4 billion each combined in increases and new positions), both of which have been stellar performers, as well as Constellation Brands ($859 million) and Formula One ($765 million).

Among the stocks that had fallen the most out of favor in terms of outflows, the top two are head-scratchers: Microsoft and Amazon, which have seen declines in hedge fund investments of $1.6 billion apiece. The former is up more than 9 percent year to date, easily beating the market, while Amazon has roared more than 23 percent higher.

Other big exits came from Autodesk (-$913 million), Safran (-$898 million) and Charter Communications (-$732 million). Each company has beaten the S&P 500 easily this year.

Hedge funds broadly this year are up 3.1 percent, as gauged by the HFRI Fund Weighted Composite Index. That compares with the 7.2 percent total return for the S&P 500 through April.

Due to Peltz's P&G investment, the first quarter was stellar for consumer staples, which easily outdistanced the other S&P 500 sectors.
You can read more articles on 13-F filings on Barron's, Reuters, Bloomberg, CNBC, Forbes and other sites like Insider Monkey, Holdings Channel, and whale wisdom.

Interestingly, Insider Monkey now compiles a list of top 100 hedge funds based on tracking their long positions on each quarterly 13-F filing. This list can be found here.

Below, a small sample of articles covering Q1 activity (click on the links to read articles):
Hedge funds crushing it? Some are but most of them are getting crushed in a brutal market and if my worst fear of global deflation materializes, a lot of hedge funds superstars are going to close shop.

It really is a brutal environment for a lot of top hedge funds. For example, John Burbank's fund Passport Capital is nursing fresh losses as assets shrink. And he's not the only one struggling in this environment.

Bill Ackman who got killed on Valeant Pharmaceuticals just came out to say 2-and-20 doesn’t work anymore for hedge funds. In an effort to garner support from institutional investors fed up with his lousy performance, his fund adjusted its fee structure last year so that clients only pay on profits in excess of 5 percent (a noble move but pretty much a marketing ploy after suffering terrible losses).

The only hedge funds that are delivering consistent returns in these markets are quant funds taking over this world. This is why they're once again at the very top of alpha's rich list.

Anyway, below I provide you with a list of top funds, not just hedge funds, and you can take your time to carefully go over their Q1 holdings.

How do you do this? Just click on the link to the fund and it will take you to the NASDAQ site which covers their latest holding.

For example, earlier this week I went over why Bridgewater's Ray Dalio is worried about the big picture and finished that comment by looking at his fund's stock holdings as of the end of March:
By the way, since I'm talking about Bridgewater, I can share with you that fund's top positions as of the end of March (click on image):

And where the fund significantly upped its stakes in Q1 (click on image, you need to click on the column heading, Change % )

As always, please remember this data is lagged and unless you're a professional trader and investor, don't bother buying or selling any stock based on top funds' 13-F filings. If you don't know what you're doing, you will get burned, and even these top funds get burned in these markets.

Case in point, check out shares of Express Scripts Holding Company (ESRX), a top holding of Bridgewater and many other top quantitative hedge funds which increased their position in Q1 as the shares declined (click on image):

Now, when you have Bridgewater, Blackrock, Renaissance Technologies and Two Sigma all significantly increasing their stake in a company as shares drop in price, it's typically a good sign but it doesn't mean the pain has ended as they all lost money on this trade (we don't know if they're adding now or dumped it).
Again, the data are lagged, we don't know whether these funds dumped shares, especially large quant funds which churn their portfolios many times throughout the quarter, but it gives you an idea of what to look for when trying to figure out which stocks to buy and sell.

In the hands of expert traders and top hedge funds and long-only active managers, this information is very useful, especially when seeing funds take concentrated positions in stocks that have declined significantly and continue to decline.

But in these markets, anyone can get burned including top funds, so you need to manage risk 100 times more carefully, or accept huge volatility if you're going to take concentrated positions in stocks.

Still, there is a lot of great information here if you know how to use it to take intelligent stock specific risk. Let me show you what I mean. One of the tech stocks I have been tracking is Akamai Technologies (AKAM).

Shares of Akamai have been hit hard this year and the stock is at a very interesting level in terms of its weekly chart (click on image):

Here you will notice the price of Akamai hit its 400-week moving average this week, which tells me shares are extremely oversold on a weekly basis. Typically, this is a beautiful buy-the-dip setup for this company (in the past, that's when you needed to load up).

I went and looked at the top holders of Akamai and saw the familiar asset manager and mutual fund giants (Blackrock, Fidelity, Wellington, Capital Research, etc.) but also well-respected alpha shops like AQR Capital Management which increased its stake in Q1 as shares declined (click on image):

I then clicked on the column heading (Change %) to see who increased their holdings significantly in Q1 (click on image):

Here you will notice two well-known hedge funds -- Highbridge Capital Management and Citadel -- significantly increased their stake in Q1 as shares declined.

Now, I'm not telling you to go out and buy shares of Akamai Technologies (AKAM) based on the little information I provided you above, but from a risk-reward perspective, these are the setups I love to swing trade and this is why I keep telling you, smart funds know how to take smart risks.

What else? From looking at the top holdings of Soros Fund Management, I noticed his fund significantly increased its stake in Trip Advsiror (TRIP) as shares declined. I then looked at the top holders of Trip Advisor, and clicked on the Change % column to see who else signifcantly added as shares delined (click on image):

Lo and behold, Two Sigma, a top quantitative hedge fund run by John Overdeck and David Siegel, also increased its stake in Trip Advisor as shares declined (click on image):

Now, that is not a bullish chart by any means and I don't know what is going on with this compamy but I'm bringing it to your attention to demonstrate 1) top funds aren't always right and/ or 2) top funds might see a turnaround before others do so keep it on your watch list as a possible turnaround candidate.

What else? I love the biotech sector, especially small to mid size biotech shares (XBI) and regularly track top biotech funds for individual company ideas. However, it's a very volatile sector and definitely not for the faint of heart, especially when investing in individual biotech shares.

Still, volatility presents opportunities for swing trades and some of the top biotech funds like Perceptive Advisors really made great moves in Q1 adding to shares of Alnylam Pharmaceuticals (ALNY) and La Jolla Pharmaceutical (LJPC) and as shares declined (click on images):

Other top biotech funds you will find below also made some excellent and some not so excellent moves in Q1. Again, this sector is very volatile (biotech is binary), so it has its share of hits and blowups.

I can show you other interesting opportunities but it takes a lot of time for me to write these long comments and painstakingly go through each setup and why it makes sense to take stock specific risks in one case and not in another (don't buy every dip blindly, most of the times you will get killed!).

What I can tell you is analyzing markets and stocks is a passion of mine. I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.

Lastly, in a recent comment of mine on the pension storm, I provided you with my macro thoughts:
[...] given my views on the reflation chimera and a potential US dollar crisis later this year or next year despite the recent selloff, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE) and Financial (XLF) shares. The only sector I like and trade now, and it's very volatile, is biotech (XBI) but technology (XLK) is also doing well, for now.

But as I stated plenty of times before, if you want to sleep well, buy US long bonds (TLT) and thank me later this year. In this environment, US bonds are still the ultimate diversifier and will save your portfolio from huge losses.

Despite the James Comey selloff today, I foresee very choppy markets this summer. Still, the risks of a reversal are high, so be prepared for a downturn and hedge your portfolio accordingly.

Of course, if quant funds have their way, we will see another melt-up like 1999-2000 where stock prices go parabolic. If that happens, the risks of a bigger downturn down the road will be magnified.
These are crazy markets but I see plenty of opportunities out there if you know how to take intelligent risks. The good news is that as this bull market matures, top stock pickers will be in high demand.

On that note, have fun going through the holdings of top funds below but be careful, things are constantly changing and even the best of breed managers find it tough making money in these schizoid markets.

I added a few funds to the list below, including hedge funds that are crushing it.

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Citadel Advisors

2) Balyasny Asset Management

3) Farallon Capital Management

4) Peak6 Investments

5) Kingdon Capital Management

6) Millennium Management

7) Eton Park Capital Management

8) HBK Investments

9) Highbridge Capital Management

10) Highland Capital Management

11) Pentwater Capital Management

12) Och-Ziff Capital Management

13) Pine River Capital Capital Management

14) Carlson Capital Management

15) Magnetar Capital

16) Mount Kellett Capital Management 

17) Whitebox Advisors

18) QVT Financial 

19) Paloma Partners

20) Weiss Multi-Strategy Advisors

21) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation

8) Tiger Management (Julian Robertson)

9) Moore Capital Management

10) Point72 Asset Management (Steve Cohen)

11) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

12) Joho Capital (Robert Karr, a super succesful Tiger Cub who shut his fund in 2014)

Top Market Neutral, Quant and CTA Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Numeric Investors

6) Analytic Investors

7) Winton Capital Management

8) Graham Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

12) PDT Partners

13) Princeton Alpha Management

Top Deep Value,
Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Gabelli Funds

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Appaloosa LP

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) JAT Capital Management

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Andor Capital Management (it shut down again, for now)

29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tiger Global Management

60) Tourbillon Capital Partners

61) Impala Asset Management

62) Valinor Management

63) Viking Global Investors

64) Marshall Wace

65) Light Street Capital Management

66) Honeycomb Asset Management

67) Whale Rock Capital

70) Suvretta Capital Management

71) York Capital Management

72) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Ghost Tree Capital

10) Sectoral Asset Management

11) Oracle Investment Management

12) Perceptive Advisors

13) Consonance Capital Management

14) Camber Capital Management

15) Redmile Group

16) RTW Investments

17) Bridger Capital Management

18) Boxer Capital

19) Bridgeway Capital Management

20) Cohen & Steers

21) Cardinal Capital Management

22) Munder Capital Management

23) Diamondhill Capital Management 

24) Cortina Asset Management

25) Geneva Capital Management

26) Criterion Capital Management

27) Daruma Capital Management

28) 12 West Capital Management

29) RA Capital Management

30) Sarissa Capital Management

31) SIO Capital Management

32) Senzar Asset Management

33) Southeastern Asset Management

34) Sphera Funds

35) Tang Capital Management

36) Thomson Horstmann & Bryant

37) Venbio Select Advisors

38) Ecor1 Capital

39) Opaleye Management

40) NEA Management Company

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase & Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason (Bill Miller)

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

37) Brandywine Global

38) Brown Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Letko, Brosseau and Associates

2) Fiera Capital Corporation

3) West Face Capital

4) Hexavest

5) 1832 Asset Management

6) Jarislowsky, Fraser

7) Connor, Clark & Lunn Investment Management

8) TD Asset Management

9) CIBC Asset Management

10) Beutel, Goodman & Co

11) Greystone Managed Investments

12) Mackenzie Financial Corporation

13) Great West Life Assurance Co

14) Guardian Capital

15) Scotia Capital

16) AGF Investments

17) Montrusco Bolton

18) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I track activity of some pension funds, endowment funds and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, CNBC's Leslie Picker reports on what hedge funds have been buying and selling. Mark Spellman, Alpine Funds, weighs in. And is tech too crowded? The "Fast Money" traders weigh in on hedge funds betting big on tech stocks.

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