Third Point’s Loeb, AQR’s Asness Named on DB Pension Enemy List

The list, published by a top teachers union, names 34 hedge funds managers involved with organizations it claims are attacking educators’ DB pension plans.

(April 18, 2013) - The American Federation of Teachers (AFT) calls it a "watch list": 34 asset managers who it claims support think tanks and organizations bent on dismantling the defined benefit (DB) pension system for educators.

All other factors being equal, the AFT encourages pension trustees to invest with, for example, the pension-neutral buyout fund KPS Capital Partners rather than, say, Kohlberg Kravis Roberts. According to the union's report, founder Henry Kravis has contributed to the Manhattan Institute—a non-profit think tank which champions replacing public DB plans with fund-as-you-go defined contribution (DC) systems.

While termed a "watch list," the publication has already spurred decisive action from one member included. Yesterday, Dan Loeb, founder of the much-hyped hedge fund Third Point Capital, canceled plans to speak on corporate governance at today's Council of Institutional Investors conference.

Loeb is a co-founder of StudentsFirst New York, the regional branch of an education reform organization, according to his profile for an upcoming alternatives conference. StudentsFirst's policy agenda says that the group lobbies for states to "honor their existing obligations to defined benefit pension plans" but also "move from defined benefits to retirement plans that are more sustainable and can be immediately accessed by all teachers.

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According to Reuters, certain pension funds had threatened to confront him at the Washington, DC event.

In a letter to the council's chair reviewed by aiCIO, Loeb cited "incorrect statements about my position on the issue of defined benefit pension plans" which had "derailed" the "critical conversation we planned to have about improving corporate governance."

"Contrary to reports," he continued, "I have never taken a position against DB plans nor has any philanthropic organization I lead. In fact, my support for and contribution to DB plans is demonstrated by maximizing returns for union members who rely on us to deliver their pension goals."

A spokesperson for AFT seemed puzzled by Loeb's denial. "StudentsFirst has been very public about its opposition to DB plans," the union representative told aiCIO. "I mean, it says so right there in the policy statements."

At 1.5 million members, the AFT is the second-largest education union in the US. Many of the asset managers it targets are of similar stature: Kravis, Loeb, AQR Capital Management co-founder Clifford Asness, and an SAC Capital managing director made the list, among others.

"This is about transparency—a right to know," said AFT President Randi Weingarten. "America's workers and pension trustees deserve to know if the asset managers they are investing their hard-earned retirement savings with are also aligned with organizations advocating for the elimination of those same pension plans."

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(April 18, 2013) — Risk parity won out as the best option for risk adjusted returns over the last three-year and 12 month periods, research has shown.

The approach of allocating to a portfolio of assets that are equally weighted on a risk basis beat a range of mainstream and alternative assets, investment consultants Redington found.

In the 12 months to the end of March this year, risk parity strategies made excess returns of 15.54%, which beat the closest contender – high yield European debt – by almost four and a half percentage points.

On a Sharpe Ratio basis, which looks at the return made for the risk taken, risk parity strategies took the top spot in this time period with a rating of 3.32. The closest runner up was US high yield debt, with a score of 2.71.

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The worst performing asset class, on both measures, was emerging market equities. Over the past year, they made excess returns of 1.56%, but only earned a Sharpe Ratio of 0.1.

Over a three-year period to the end of last month, risk parity again outperformed, but more moderately.

Excess returns for the approach reached 12.25%, with a Sharpe Ratio of 1.71. In second place, in terms of excess returns, index-linked UK government bonds produced 10.41% but fell behind emerging market debt hard currency on a Sharpe Ratio basis with a score of 1.46.

Over a five-year period, returns were dampened further, with risk parity slipping to fifth place on an excess return basis and fourth in terms of Sharpe Ratio.

Recently, market participants have questioned whether risk parity has been oversold and considered the “bubble” bursting.

Kevin Kneafsey, senior advisor, multi-asset investment and portfolio solutions at Schroders, said: “The part of the bubble I think you are right to worry about is the product push in this space and the lack of thought behind many of them. The idea of better balancing risk across the key drivers of asset returns makes a lot sense. Blind applications of equal risk to assets can be quite dangerous and lead to very poorly balanced risk exposures. It is these risk exposures that ultimately drive the asset returns and determine the portfolio risk.”

For an in-depth investigation on how the approach is spreading across Europe, see aiCIO magazine published later this month. For the full Redington paper, click here.