Monday, November 28, 2005

Hedge Funds and Pensions

Interesting article in the Sunday New York Times regarding how more pension plans (it appears the article is only referring to defined benefit plans) are putting a significant amount of plan assets into hedge funds. The reason that this raises some red flags for some (including me) is that hedge funds are usually less regulated than other forms of traditional investments and some notorious hedge funds have gone belly up in the last few years. 

Of course, with any investment undertaken by ERISA fiduciaries, the fiduciaries must act with an eye single to the interests of the participants and beneficiaries of the plan and must act as prudently as a reasonable ERISA fiduciary would under the circumstances.   There is also a requirement of prudent diversification placed on the fiduciary.  Whether all of these fiduciary duties can be met in any given circumstance remains to be seen, but I am not at all buoyed by one comment in the article in which Susan M. Mangiero, author of "Risk Management," a textbook for pension officials, "said she had come across pension executives who had not done that level of analysis. Some did not even know they had derivatives in their portfolios, she said."

In the days of Enron and United Airlines, I have to say that I am a little skeptical that this development will help pensioners in the long run, but I am certainly open to convincing by others.

Update: Vic Fleischer over at the Conglomerate blog has an interesting post on this article as well.

Posted by: Paul M. Secunda

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