Irish pension funds haemorrhaged an estimated euro 27 billion (US$36.5 billion) in 2008, as the global economy moved towards recession and equity markets across the world went into freefall.
Pension fund exposure to Bernard Madoff’s alleged Ponzi scheme has raised questions about the governance of so-called professional investors.
Two US funds, the $US15 billion New Mexico State Investment Council and the $US2.1 billion Baltimore Fire and Police Retirement System, have revealed exposure to Madoff through funds-of-hedge funds, as has the UK’s $US6.4 billion Merseyside Pension Fund.
The New Mexico fund confirmed an exposure of $18 million, while the Baltimore fund is understood to have around $US3.5 million at stake. The Merseyside fund has a $US2.9 per cent exposure through a Bramdean Alternatives fund-of-funds.
These exposures raise serious questions about the due diligence of large pension funds, and the lack of transparency around the underlying managers in funds-of-hedge fund investments.
Bramdean said in a statement: “The Madoff business has been subject to due diligence by many of the most experienced professionals in global markets, including our own advisors, RMF Investment Management – Nassau branch, which is part of MAN Group – The alleged failure raises fundamental questions about the regulatory system under which this has happened and no doubt this will be the subject of intense debate as the facts emerge.”
Harry Markopolos, the self-described derivates expert who contacted the Securities and Exchange Commission over two years ago claiming Madoff was a fraud, raised the fact that the fund did not allow outside performance audits as one of his “red flags”:
“One London-based hedge fund-of-funds, representing Arab money, asked to send in a team of big-four accountants to conduct a performance audit during their planned due diligence. The were told: “No, only Madoff’s brother in law, who owns his own accounting firm is allowed to audit performance for reasons of secrecy in order to keep Madoff’s proprietary trading strategy secret so that nobody can copy it. Amazingly, this fund-of-funds then agreed to invest $200 million of their own client’s money anyway, because the low volatility of returns was so attractive.”
We first published this document in November 2005 during a period of healthy markets and around the peak of the US housing bubble. The main conclusion from the note was that we had just been through an unparalleled period of returns in all asset classes.
As the end of the year approaches, the issue of rebalancing for pension funds – a vexed one in the market volatility of the past year – is becoming more acute. US-based adviser Callan Associates is advising clients to depart from the normal disciplines around rebalancing in these extreme conditions.
Next year will herald a “new paradigm” for investors where income once again becomes a focus of thought, according to the global head of institutional investments at Fidelity International, Michael Gordon.
Professional money managers expect a considerable bounce from the current market lows, and they anticipate this swing to take place sometime next year, according to the latest Investment Manager Outlook, a quarterly survey of investment managers conducted by Russell Investments.