Pennsylvania CIO Accused of Personal Trading with SERS Info

Tony Clark, CIO of the $27 billion fund, is also accused of withholding investment information regarding Tiger Asset Management, according to internal legal documents.

(December 18, 2013) — CIO of Pennsylvania State Employees’ Retirement System (SERS), Tony Clark, has been accused of trading on his own account and of withholding investment information, according to documents obtained by aiCIO.

The privileged and confidential document prepared by the law offices of Stradley Ronon Stevens & Young from December 10 outlined allegations against Clark during his tenure at the $27 billion fund. The redacted document Is largely based on an interview with one attorney at SERS who raised the allegations.

“It was clear throughout the interview that [redacted] has strong unfavorable opinions concerning Clark’s integrity and competency,” the report said.

Concerns about Clark’s behavior began even before he began his term at SERS, according to the document—it was believed that Clark’s appointment to CIO involved “some political horse trading.”

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Clark was additionally accused of trading on his own account using information he obtained from his position at the pension plan. The first alarm rang in May or June of 2013, the report stated.

The CIO was said to have asked an employee to contact an outside portfolio manager to discuss master limited partnerships—strategies SERS was not considering at the time. Clark continued to ask “questions that were kind of strange,” but employees were discouraged to report the issue to the Office of the Inspector General because “anyone challenging Mr. Clark was fired.”

An employee who did report it to the legal department never directly saw Clark trade on his own accounts. The Pennsylvania office of Attorney General collected Clark’s computer and files last week to conduct investigations.

Clark had allegedly withheld information regarding SERS’ investments from the board—particularly the $250 million held by Tiger Asset Management, the document concluded.

The concerned attorney said “the Tiger investment was Clark’s priority when he arrived at SERS and that Clark had a friendship with an individual at Tiger from his prior investment firm employment” and further believed “Clark was too hasty in entering into the Tiger Investment.”

The rush to partner with Tiger Asset Management—a firm usually concerned with individual investment pools for high net-worth individuals—resulted in an oversight of due diligence usually performed on managers, the report said. The attorney also stated that Clark rejected the idea of hiring a hedge fund consultant to fully understand the investment.

“Tiger had ownership interests in the underlying businesses in which SERS was investing through Tiger, and Tiger was paid fee from those businesses,” the report said. “In actuality, [redacted] believed that Tiger was freeing up the money of other high-end individual investors in Tiger by replacing their investment funds with funds from SERS.”

One year after investing with Tiger, SERS found a $20 million loss from the firm’s general underperformance, which is when “Clark removed the breakdown of the performance of each individual manager from the investment report provided to the board.”

Gary Tuma, the Pennsylvania Treasury communications director, previously told aiCIO that Treasurer Rob McCord found performance reports were repeatedly pulled from board meetings and audio transcripts of various meeting were frequently unavailable.

When McCord asked Clark about the missing information at the April 2013 board meeting, the CIO responded that the information has “never been there,” according to the report. After Clark refused to pull investments from Tiger, the attorney claimed that “there was something in it for him.”

The legal document also outlined areas of concern extending to SERS’ chairman Nicholas Maiale: outside managers were often taking Maiale out to lunch; Maiale, as chairman, is essentially responsible for Clark’s appointment; there is evidence of SERS’ securing “political deals” for Maiale that may not be suitable for the pension plan, and; the CIO “pushed whatever investment Maiale wanted.”

The law firm found there may be “insufficient information” to report Clark’s alleged actions to the Securities and Exchange Commission. However, it stated that the CIO’s conduct might have violated state ethics laws, allowing the Office of General Counsel to step in.

A person close to the Pennsylvania pension fund said there is more to be revealed about Clark’s actions, beyond the redacted version of the confidential document.

(December 17, 2013) – Ever wondered which smart beta strategies perform best in the short and long term? ERI ScientificBeta, a venture from the EDHEC-Risk Institute, has compared and contrasted more than 2,000 indices with some surprising results.

Comparing the performance of smart factor indices first—those that abandon market cap weighted indices in favour of factor-weighted indices, such as liquidity or volatility—ERI ScientificBeta found that all diversified multi-strategy indices outperformed market cap weighted ones over the long term.

In its November Smart Beta Performance Report, strategies using book-to-market (a ratio used to find the value of a company by comparing the book value of a firm to its market value), dividend yield, size, liquidity, and volatility were all compared over a one month, year-to-date, and long term (since 1970) track records.

The highest performing indices were the small cap index, and the high book-to-market index, which produced 2.75% and 2.73% returns over the long term. The high book-to-market index also exhibited the highest information ratio.

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When assessing the year-to-date returns, some of the strategies experienced losses, although the authors of the report pointed out this was expected, as these strategies tend to experience return fluctuations in accordance with the variation in risk premiums associated with these factor tilts.

In addition, some of the indices experienced larger return spreads than others: volatility indices displayed the biggest spread with returns of 5.28% since the start of 2013 for the high volatility index compared to a loss of 2.03% for the low volatility index.

Next, ERI ScientificBeta compared the more vanilla, plain diversification strategies, including diversified a risk parity strategy and an efficient maximum Sharpe ratio strategy.

Again, over the long term (here, since inception in 2002), all diversification schemes posted positive returns. The best performance was delivered by the efficient minimum volatility index, with a Sharpe ratio of 0.66. However, this strategy was also the one with the largest tracking error, meaning it had the lowest information ratio.

When considering the information ratio, which measures the risk-adjusted relative performance, a diversified risk parity strategy takes the lead, with a Sharpe ratio of 0.97.

Over a shorter period—year-to-date—only the efficient minimum volatility strategy made a loss. The best performing over the past 11 months was the maximum decorrelation strategy, posting a return of 1.64%.

Finally, ERI ScientificBeta considered how much of an impact the geographical location of investors’ money made. The short answer is: not much.

When considering the best and worst performing indices since inception—taking into account 2,442 of ERI ScientificBeta’s indices—all of the top three performers and two of the bottom three performers were based in the Asia-Pacific (ex-Japan) region, suggesting that the right strategy matters more than where you invest.

The top three strategies since inception were the Developed Asia-Pacific (ex-Japan) value maximum decorrelation index (sector neutral), the same region’s value efficient maximum Sharpe ratio index, and the value maximum decorrelation from the same region.

The worse performing indices were a high-volatility efficient minimum volatility index from the same Asia-Pacific (ex-Japan) region, followed by a high-volatility efficient maximum Sharpe ratio index. The third worst performer was a developed Europe strategy, also using a high volatility efficient maximum Sharpe ratio index.

However, over the past year, the tables are reversed, and it’s the high volatility maximum deconcentration and decorrelation strategies which are the top performers, primarily across Japan and the Eurozone.

The poorest performers in the past year were efficient minimum volatility strategies. This, the report said, was driven by the recent bull run in equities—minimum volatility strategies perform best in bear markets.

Earlier this year, EDHEC challenged investors to think about smart beta in a “2.0” way, recommending that the choice of systematic risk factors for smart beta benchmarks should be explicit, and made by the investor, not the index promoter.