Aussie Superannuation Fund Counters Scrutiny Over Millions in Losses From Currency Hedging

The A$5.8 billion MTAA Super fund is being investigated by the Australian Prudential Regulation Authority (APRA) over its response to the global financial crisis.

(June 8, 2011) — The A$5.8 billion MTAA Super is being investigated by the Australian Prudential Regulation Authority (APRA) for removing its currency hedges in the midst of the global financial crisis, the Australian press is reporting.

There has been huge volatility in the Australian dollar vis-à-vis the American dollar, contributing to a reported A$500 million in losses by the MTAA superannuation fund for the removal of its currency hedges during the financial crisis. However, following the claims, MTAA Super defended its practice of currency hedging, noting that it did not suffer $500 million in losses from removing currency hedges. “The fund was hedged during the financial crisis and as a result, when the Australian dollar plummeted, it — like all funds that were similarly hedged — paid for the hedge contracts that matured during that time,” MTAA Super Chief Executive Michael Delaney told The Australian. MTAA Super added that currency risk is a risk faced by all superannuation funds that have offshore investments.

The Australian also reported that regulators must go easy on superannuation funds for making investment losses, as they will risk undermining member confidence in funds. Warren Chant, director of industry consultants Chant West, echoed Delaney’s claims, telling the publication that most funds used some amount of currency hedging to guard against fluctuations in the value of their overseas assets. Consequently, all those funds would have lost money following the financial crisis when the dollar plunged.

In March, aiCIO explored the greater commitment to currency exposures among Australian schemes as a result of the global financial crisis (GFC).

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“Speaking broadly, the GFC has brought to life the idea that funds need to dynamically manage their currency exposures,” said State Street Global Services Head of Sales for Australia Greg O’Sullivan. Other outcomes of the crisis, according to O’Sullivan, include more stress testing, a greater appetite for outsourcing, and carrying more cash. “The forward spreads in September and October 2008 were immense,” added O’Sullivan’s colleague Ian Martin, Head of SSgA S.E Asia and Pacific and Head of Global Markets Australia & New Zealand. “The cost of hedging was so high that funds now focus a lot more on how much cash they have available—above and beyond the 9% a year that flows into the system.”

“With many capital pools increasing in size (and few are doing so faster than the Australian superannuation funds) and thus likely to outstrip home-market capacity (yes, even American investors will invest more externally), more portfolios will be exposed to currency fluctuations,”aiCIO‘s Editor-in-Chief Kip McDaniel reported. “As they are, funds would be well advised to learn from Australia’s recent travails: Hedge your currency exposure, but be prepared for what that hedge will do.”

Click hereto see the new GC Australia — a sister publication to aiCIO — that focuses on the Australian superannuation and alternative fund industry, from a securities services perspective.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

MassPRIM’s board has approved a plan to choose its first 10 hedge fund managers who will manage roughly $500 million that had previously been allocated for hedge fund-of-funds.

(June 8, 2011) — The board of the $50 billion Massachusetts Pension Reserves Investment Management (MassPRIM) approved a plan on June 7 to pick its first 10 hedge fund managers at its meeting scheduled for October, and an additional 10 managers at its meeting in December.

The timetable marks the implementation of MassPRIM’s February 1 vote to shift about $500 million of its $3.8 billion hedge fund-of-funds allocation to a direct hedge fund pilot program.

“At this point, our June 7 decision was simply to approve the investment policy to allocate $500 million to hedge funds away from five fund-of-funds,” MassPRIM Executive Director Michael Trotsky told aiCIO. “This is a pilot program intended to test our due diligence.” Trotsky added that that they will look at possible hedge funds from “across the gamut.”

Cliffwater LLC serves as the system’s direct hedge fund consultant and will guide the search for the 10 managers. Cliffwater will focus on established, institutional-quality hedge funds firms that could manage additional capital if and when MassPRIM decides to expand the pilot program.

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Potential managers will need to have a three-year track record and represent at least $500 million in assets under management. The 10 managers chosen in October will be awarded $255 million, and the 10 chosen in December will be awarded the remaining $245 million. MassPRIM aims to have all initial capital deployed by January 2, 2012.

There has been an exodus of capital in recent years away from hedge fund-of-funds. An April Preqin survey showed the overall hedge fund-of-funds industry has dropped from $1.25 trillion in 2008 to $910 billion as of Q2 2011. The Bernie Madoff scandal in addition to the desire of asset owners to decrease fees in an age of diminishing returns has powered the trend, aiCIO has reported.

For MassPRIM, the shift can largely be ascribed to a change in leadership.

“Tim Cahill, our previous treasurer, felt that having a fund-of-funds approach would achieve better diversification,” MassPRIM spokesman Barry Nolan told aiCIO in April. “But there’s also the argument that with a fund-of-funds strategy, you can reach a point of diversifying too broadly, leading to diminishing returns,” he said, noting the while Cahill, who suffered a tarnished reputation over accusations of political influence, achieved solid returns as treasurer, concern centered on the middle layer of management that his fund-to-funds approach created, aiCIO reported in February.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>