The University of California’s largest employee union released a study and follow-up report last Tuesday detailing the UC system’s loss of nearly a billion dollars in a series of hedge fund investments over the past 12 years. The report alleges that the UC’s hedge funds have “routinely underperformed,” and may have cost the system more than $950 million dollars in just over a decade.
The study by employee union AFSCME Local 3299, titled “Missing the Mark,” explains that a hedge fund is a private partnership investment, largely unregulated by the Securities and Exchange Commission (SEC). Hedge funds like those managed by the UC system can be high-risk and largely uncorrelated to stock market volatility. UC’s hedge funds, however, have been disproportionately affected by market fluctuations, which the study argues led to the system wide loss of almost a billion dollars in just 12 years.
The report highlights the financial strain of employing hedge fund managers for UC, along with the risk of having them generate low returns. Since 2003, “by conservative estimates, UC has paid $1 billion in management and performance fees to [hedge fund investments] UC Retirement Plan and General Endowment Pool.”
Further, UC hedge fund managers were paid $1 by the UC for every $2 they generated in returns, according to the study.
“If UC had instead invested the same amount of money in more traditional asset classes, it could have saved an estimated $950 million in fees during the same period,” per the report.
AFSCME 3299 members argue that UC Regents’ high-risk investments during an economic recession have been irresponsible, taking into account rising tuition fees and staff cuts during the same period.
Todd Stenhouse, a spokesperson from the union, says that stakeholders — including UC students, faculty, and California taxpayers — have “a right to know what’s happening with their money,” and are directly affected by the expense of hedge funds.
“Fees paid to hedge fund managers are such a drag on returns,” says Stenhouse. “That’s real money, and it translates to all the issues we’ve been talking about for years — tuition hikes, pay cuts, faculty cuts throughout the UC system.”
AFSCME 3299 President Kathryn Lybarger advocates for increased transparency as a means of reducing exorbitant fees paid to hedge funds.
“This study raises important questions about whether a decade of unprecedented austerity measures, tuition hikes, and pension cuts at UC could have either been minimized or avoided altogether,” she said in a statement. “At a minimum, we need higher levels of transparency and stakeholder engagement in UC investment practices to ensure that the hard earned dollars of UC students, staff, donors and California taxpayers are being managed in a cost-effective fashion.”
The study implies that UC might avoid a new round of proposed staff cuts planned for this year, or tuition increases slated for 2017, if UC Regents reduced the approximate billion dollars paid to hedge fund investors and managers and instead opted for lower-risk investment strategies. AFSCME 3299 also advocates “greater public accountability and stakeholder involvement” as a means of reducing UC payments to hedge funds and potentially reducing the strain on tuition and budget cuts.
Joe Kiskis, Vice President of the Council of UC Faculty Associations (CUCFA), notes that in the midst of the AFSCME report’s release, UC is currently considering a round of faculty pension cuts which could be connected to the hedge fund losses.
“More pension cuts could do irreparable damage to UC’s ability to attract world class faculty, doctors and researchers,” said Kiskis in a statement. “Before any such actions are considered, UC has a responsibility to its students, staff and taxpayers to provide more transparency around its investment holdings, and more stakeholder engagement in the way these assets are managed.”
AFSCME 3299 urged the University of California to compare current hedge fund investment practices to more low-fee alternatives, require public fee disclosure from hedge fund managers and consultants, and encourage more transparency around investments related to public pension plans.