Column: OPERS hedge funds grew from zero to $13.4 billion in 4 years

The two largest Ohio public pension systems responded July 30 to my July 20 column that said the math doesn’t add up for Gov. John Kasich’s claim that “rock solid pensions” were a reason to elect him president.

My experience as an award-winning investigative reporter for TV stations in Columbus, Cleveland and Cincinnati has me convinced that this is a story you’ll be hearing much more about soon. The story is too big to ignore, and the key facts are incontestable.

Neither Ohio Public Employees Retirement System Executive Director Karen Carraher nor State Teachers Retirement System Executive Director Michael Nehf in their responses dispute the fact that Ohio’s five retirement systems report a combined $134.5 billion pension liability on the U.S. Census Annual Survey released June 14, 2016 (summary data available online at https://www.census.gov/govs/retire/).

There is also no dispute that Ohio is one of the states with the most funds devoted to alternative investments — combined hedge funds, derivatives and private equity funds. Each director defends the high fees paid on these investments as reasonable, although neither director quotes the total amount paid out.

See if this sounds reasonable to you:

In 2010 OPERS had no hedge funds and paid external managers $128 million; in 2015 they paid $428 million in fees to external managers.

In 2011, when John Kasich took office as governor and Karen Carraher got the top spot at OPERS, the hedge fund investment went from zero to $13.4 billion in just four years. During the Kasich/Carraher reign at OPERS, external managers have been paid $1.6 billion, with $431.3 million going to hedge funds and $415.6 million to private equity.

Carraher makes much of the fact that the funded percentage of OPERS improved to 85 percent last year, but she fails to note that it was achieved with a process called smoothing. Smoothing is widely used in the industry to spread gains and losses over a four-year period — and notably in OPERS’ case, it delays the terrible investment returns of recent years.

In 2015 OPERS paid out $3.95 billion more than it took in and lost 0.03 percent on investments — far short of the $7.2 billion increase called for in the 8 percent Return on Investment assumption.

Neither director disputed the superior returns and lower costs of an S&P 500 index in comparison to the average hedge fund. The five-year annualized return for the Barclays hedge fund index is 3.3 percent while the S&P 500 produced an annualized return of 13.04 percent over the same time period.

Investing in a costly, underperforming asset class has cost Ohio billions of dollars in unrealized investment earnings. OPERS’ hedge fund portfolio in the five years since Kasich and Carraher took over is more than $3.3 billion less than funds costing 40 times less would have produced.

Why are hedge funds attracting pension money? Perhaps the fact that they are the largest single contributor to the 2016 presidential campaign, with $122.7 million or 14 percent of all money contributed so far, according to the Center for Responsive Politics (data available online at https://www.opensecrets.org/industries/). Why aren’t Ohio Democrats making this a huge issue? Could it have something to do with Hillary Clinton collecting $48.5 million from hedge funds?

Neither pension fund director disputes the fact that the Ohio General Assembly required all the pension systems to alter benefits, contributions or both because the gap between assets and liabilities was too big to close any other way. That gap is quickly growing much larger as Ohio pays hundreds of millions of dollars to hedge fund managers who trail market returns by billions of dollars.

Ohio has become the nation’s leading hedge fund investor just as hedge funds have become the top source of presidential campaign funds. Whether these are unrelated facts or evidence of a developing scandal depends entirely upon your opinion of Gov. John R. Kasich.

John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Sandusky County.