Joining FX Scrutiny, Ohio Treasurer Seeks to Investigate State Street, BNY Mellon Charges

Ohio's treasurer has asked the state's attorney general to look into the foreign currency exchange practices of the two largest US custodians -- State Street and BNY Mellon -- which oversee pension fund holdings.

(June 15, 2011) — Ohio Treasurer Josh Mandel has asked for a state investigation into whether banks may have cheated on currency transactions in order to allegedly maximize their profit, manipulating foreign exchange rates charged to the state’s pension funds.

The inquiry would add to a list of investigations or lawsuits launched in a number of states — including California, Florida, and Virginia — where banks have been alleged to have cheated clients.

Mandel, who acts as custodian to Ohio’s public pension schemes including the Ohio Public Employee Retirement System, School Employees Retirement System of Ohio, State Teachers Retirement System of Ohio and the Ohio Police & Fire Pension Fund, said that he has asked the state’s attorney general, Mike DeWine, to look into whether pensioners “have been exploited by custodial banks when conducting foreign currency exchanges.” As of April 30 2011, the four funds had about $39 billion of their $170 billion in combined assets invested in international securities, according to Reuters.

“I am concerned that the banks may have manipulated foreign currency trade prices in order to maximize the banks’ profit, at the expense of Ohio public servants, businesses and taxpayers,” Mandel wrote in a letter dated June 14.

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The investigation by the Ohio Treasurer comes as a burgeoning number of states are looking into investigations or lawsuits against State Street and BNY Mellon, which both offer foreign investment services to pensions and other types of funds. These custody banks have been accused of preying on public pension funds that lack the resources to maintain proper oversight on FX trades, aiCIO has reported. This week, Massachusetts State Treasurer Steven Grossman and Massachusetts Pension Reserves Investment Management (MassPRIM) Executive Director Michael Trotskyannounced in a press conference that the state’s $50 billion pension fund had been overcharged $20 million on foreign exchange trading by BNY Mellon.

“These overcharges are unacceptable and we will take every step available to recover lost funds and prevent this from happening in the future,” Grossman said in a statement.

The Securities and Exchange Commission (SEC), along with several state attorney generals and other regulators, began investigations this spring into BNY Mellon and State Street Corporation.

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

(June 15, 2011) — Amid aims to meet its 6% target to hedge funds, the Florida Retirement System has hired two hedge funds and is seeking to hire others.

According to HFMWeek, the Florida State Board of Administration (SBA) awarded $100 million each to King Street Capital Management and Taconic Capital Advisors. Meanwhile, the administration, which overseas the state’s $131.5 billion pension fund, approved two additional hedge fund investments. Earlier this year, the board allocated $100 million to Mason Capital and $150 million to Highline Capital Partners, a long/short equity fund.

Also this week, the investment staff of the San Diego County Employees Retirement Association (SDCERA), which manages around $8 billion in assets, has recommended a new $50 million allocation to metals-trading hedge fund Red Kite. The allocation would be based within the fund’s real assets portfolio. Currently, the board has a 10% target allocation to the asset class, HFMWeek reported.

Recent data from Chicago-based Hedge Fund Research has pointed to the strength of hedge funds, with emerging hedge fund assets having risen to $121 billion in the first quarter of 2011, surpassing the previous record level of $117 billion set in 2007. The industry tracker noted that hedge fund assets in emerging markets have reached the new record level in the first quarter of 2011 as global investors increased exposure to emerging Asia and Russia.

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“The record level of assets invested in emerging market hedge funds represents the latest evidence that global investors continue to exhibit a preference for accessing specialized emerging markets exposure via hedge funds,” said Kenneth J. Heinz, President of HFR. “As a direct result of the strategic specialization, sophistication and improved structure of emerging market hedge funds, the number of funds located in Brazil, China, Russia, Singapore and UAE all continue to grow, and we expect this trend to continue in 2011 and in coming years.”

Greater flow of institutional money and efforts to increase transparency and accessibility have also helped boost the hedge fund industry to its all-time high in assets under management. As firms continue to seek diverse and higher performing investment opportunities, Neel Mehta, a consultant on Towers Watson’s hedge fund research team, told aiCIO that he has witnessed a significantly greater number of new hedge fund launches this year compared to ever before. “I think people are seeing this wave of money coming to hedge funds, and others are following,” he noted.

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