Tuesday, November 29, 2005

Hedge You Win - Tails I Loose

The Sunday NY Times had one of a number of recent articles on hedge funds featuring David Swenson, the Chief investment Officer of Yale's Endowment Fund. The central point of the article was that (unless you are an institutional investor) if you can get into a hedge fund or fund of funds...then it is probably a dog!

The sample case was Duetsche Bank's Hedged Strategies Fund available to investors since 2002 with a minimum investment of $50K. It is a "fund of hedge funds," which consists of a portfolio of investments in underlying hedge funds. Expenses included the underlying hedge funds fees of 1% plus 20% of profits plus an additional 1.95% annual management fee and a 0.25 percent administrative fee. An additional sales load of 3.5% was apparently available to certain brokers who were able to catch any fish with this lure. So about 3.20% before profits and load!

Performance, as you might have expected, ranged from pitiful to relatively poor depending on the actual fees paid. Deutcshe bank plans to close the fund in 2007 due to "relative performance and dwindling interest in the fund."

Monday, November 28, 2005

Increasing 401(k) Plan Participation

According to many research studies, the embedded rate of 401(K) plan non-participation is about 25% - 30% regardless of matching levels or other plan features. In order to improve plan participation and to pass plan discrimination tests, sponsors have gone beyond self directed accounts and sector funds and are now considering a number of new options including ; auto-enrollment, target retirement asset allocation funds, managed accounts and annuities according to the WSJ.

Utilization of these options varies according to the Hewitt Associates study referenced in the article. For instance,
19% of 401K plans offer auto-enrollment. We have noted in other studies that this 19% is composed primarily of large plans. We are also aware that some states may have anti-garnishment laws that could conflict with these practices so plan sponsors should beware of this issue. This plan attribute probably correlates highest with increased participation.
16% of Plans have Managed Accounts - Our experience would suggest that this is a large market or high average plan balance phenomena as well.
63% of plans have asset allocation funds -this percentage does not include generic balanced funds but does include lifestyle funds and target maturity funds.
51% of Plans offer one on one financial planning - providing access to on line planning tools probably accounts for the high percentage here even though participant utilization of this option remains quite low.
26% of Plans offer automatic rebalancing of participant accounts.

When benchmarking your plan features, it is important to reference best practices in the industry. However, take care to understand the plan population used as a comparator since large market plan characteristics can be quite different than small and mid market plans.

Sunday, November 27, 2005

Pension Fund Hedging

A NY Times article this morning pointed out the interest and issues associated with Pension Fund Investments in Hedge funds. Pension fund interest and actual $ commitments in hedge fund investing is clearly growing and investment providers are responding to the interest by developing and marketing their own hedge funds products...primarily fund of funds or "near" hedge fund products which use long -short and portable alpha strategies.

While not all hedge funds strategies are as inherently risky as others, the generic issues with hedge funds from a fiduciary perspective are their high fees, lack of transparency/disclosure and potential risks that may not be well understood or quantified by either the investors or managers. Of particular interest to plan fiduciaries should be the DOL's lack of specific guidance in this complex area. They refer to the 1996 letter to the Comptroller of the Currency as their position paper on the hedge fund issue. While the letter refers to derivatives, it obviously extends to hedge funds strategies, many of which use derivative instruments.

"In determining whether to invest in a particular derivative, plan fiduciaries are required to engage in the same general procedures and undertake the same type of analysis that they would in making any other investment decision. This would include, but not be limited to, a consideration of how the investment fits within the plan's investment policy, what role the particular derivative plays in the plan's portfolio, and the plan's potential exposure to losses. While derivatives may be a useful tool for managing a variety of risks and for broadening investment alternatives in a plan's portfolio, investments in certain derivatives, such as structured notes and collateralized mortgage obligations, may require a higher degree of sophistication and understanding on the part of plan fiduciaries than other investments. Characteristics of such derivatives may include extreme price volatility, a high degree of leverage, limited testing by markets, and difficulty in determining the market value of the derivative due to illiquid market conditions"

Based on this language, Plan fiduciaries have a high standard of analysis and evaluation to ensure hedge funds are prudent investments for their plans. These standards can only realistically be met with fully transparent hedge funds and sophisticated investment Trustees. Fiduciaries liabilities are increasing as these conditions are not keeping pace with the growth of hedge fund exposure in pension plans.

Saturday, November 26, 2005

Blog Apnea

The Greek words "blog apnea" literally mean "without entries." Obstructive blog apnea (OBA) is caused by a blockage of the blog, usually when the blogger is concentrating his/her thoughts and efforts elsewhere. With each apnea event, the blogger turns his/her atention to other things , but consequently his/her blog may become stale, extremely fragmented and of poor quality.

After a lengthy apnea we are back on task with lots to catch up on. During this outage,

The forces conspiring to rid the planet of traditional defined benefit plans seemed to gain ground based on;
1) the accelerating pressue the airlines, automakers and other threatened industries are putting on the PBGC,
2) the proposed legislation and regulation designed to avoid further exercise of the "PBGC put"
3) the changes in pension accounting being considered by the FASB
4) the growing recognition that corporate pension underfunding may be rather modest compared to the financial status of state/municipal pension plans.

Social Security reform and any momemtum towards privatization have virtually disappeared as the country losses confidence in Bush 43.

Legislators are coming to grips with the reality that individuals are largely unprepared, undereducated and seemingly uninterested in managing their own retirement futures. The resolution will be to unleash "advice providers" on this market possibly making the cure more dangerous than the disease.