Pension Funds Should Report Performance on a Monthly Basis, Markov Says

All public pension plans in the US should start reporting their returns on a monthly basis to improve transparency at their funds, say researchers at Markov Processes International (MPI).

Moving to monthly data reporting happens to be something the New Jersey-based investment researcher could help with. The company has built its business using returns-based techniques to evaluate whether financial disclosures at funds match up with their asset allocations.

“It’s a perfect due diligence—quick and precise due diligence—tool,” said Michael Markov, co-founder and chairman of MPI. “It doesn’t require a connection to a custodian.”

The analysis helps the firm measure what assets portfolios are exposed to, what risks a fund has taken, and whether the level of risk is appropriate for the fund. It could also help disclose some hidden fees and expenses, Markov said, that can help people “understand all the decisions” that go into investments.

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“With the proper analysis, it gives a lot of transparency and then transparency can be understood in different ways,” Markov said.

MPI, which was founded in 1992, is known for its returns-based analysis, which is based on the investment research methodology designed by American economist and Nobel Memorial Prize winner Bill Sharpe.

MPI used that same analysis on Norges, the $1.3 trillion Norwegian sovereign wealth fund, to review how well its asset allocation linked up with its monthly public disclosures. After breaking down the fund’s allocation by asset class, then region, then factors, MPI discovered that the composition of the fund lined up with the fund’s financial disclosures.

Norges moved more toward equities, and away from bonds, over the course of more than two decades, MPI found. Within equities, the sovereign wealth fund also tilted more to European and developed markets over time. Those findings also line up with disclosures the fund has made to its stakeholders, helping it build a reputation for transparency, MPI said.

The same monthly returns analysis can help provide insight into public pension funds in the US that are less transparent, the researchers said. It’s a concern for a number of pension funds that have recently been swept up in transparency scandals in states such as Pennsylvania and California.

But skeptics disagree with the investment researchers. Some allocators argue that reporting returns on a monthly basis—as opposed to a quarterly or annual timeline—could encourage a short-term outlook on investments, when institutional investors operate over a longer time horizon. Many assets managed at public pension funds may underperform in the near term, but outperform as time wears on, they say.

For public pension funds that do need to improve transparency, critics say it’s far more important that allocators learn how to communicate their investment processes to their board trustees.

Understanding trustees’ risk tolerance, walking board members through the ins and outs of opaque investments, and setting expectations for performance are all more fundamentally needed to encourage transparency at pension funds than is more frequent reporting, allocators say.

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Tags: 401(k), Markov Processes International, MPI, Pension, Pension Funds, plan, Retirement

The US Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have charged a Canadian hedge fund trader with securities fraud and wire fraud for allegedly using inside information to conduct a front-running scheme in which he raked in more than $3.6 million.

Front-running is when a broker trading financial assets uses inside knowledge of a future transaction that is about to affect its price substantially. The legal complaints filed by the DOJ and the SEC allege that, over the course of more than six years, Sean Wygovsky had been committing insider trading through the misuse of confidential, material, non-public information about the securities trade orders of the firm he worked for. He allegedly did this by placing timely, profitable securities trades based on that information in accounts controlled by him or by family members.

Although the name of the company is omitted from the complaints, a LinkedIn profile for Sean Wygovsky that is now no longer available had listed him as being employed by Toronto-based Polar Asset Management Partners Inc. since 2013, the same year the complaints say he started working at the unnamed firm. And a 2016 magazine article profiling him as a rising star in the hedge fund industry said he worked for Polar Asset Management.

Wygovsky allegedly took advantage of the fact that the size of his firm’s trade orders often caused slight, temporary movements in the price of the securities traded. For example, if the firm made a large purchase of stock, the increased demand could cause a slight rise in the stock price, and if the firm was engaged in a large sale of stock, the increased supply could cause a slight drop in the stock price. Because Wygovsky had access to the firm’s trade orders, he knew in advance when a particular stock price would move slightly up or down based on that trading.

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“As alleged, Sean Wygovsky illegally exploited his access to his employer firm’s yet-to-be-executed trade orders to make numerous trades in anticipation of the bump or dip the firm’s buying or selling would cause,” US Attorney for the Southern District of New York Audrey Strauss said in a statement.

Wygovsky, who the US Attorney’s office said made the illegal trades over 700 times, allegedly tried to cover his tracks by trading or causing trading in brokerage accounts held in the names of close relatives of his. Two of his relatives allegedly moved millions of dollars between 2015 and 2020 from their trading accounts to bank accounts they controlled, and then wrote checks to Wygovsky and his immediate family members for hundreds of thousands of dollars. The two relatives also allegedly transferred hundreds of thousands of dollars to a Slovenian bank for the benefit of relatives of Wygovsky’s wife.

“As alleged in our complaint, Wygovsky abused his position and his employer’s trust by front-running the very securities transactions that he was tasked with executing for his employer’s advisory clients,” Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, said in a statement. “Thanks to the SEC’s development and use of sophisticated data analytics tools, Wygovsky’s alleged scheme was uncovered and his efforts to evade detection by using family members’ accounts failed.”

Wygovsky, 40, is charged by the US Attorney’s Office for the Southern District of New York with one count of securities fraud, which carries a maximum sentence of 20 years in prison, and one count of wire fraud, which carries a maximum sentence of 20 years in prison. The SEC has charged him with violating the antifraud provisions of the federal securities laws and is seeking disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.