A group of hedge fund managers and the funds they manage have come under attack from American Federation of Teachers (AFT), a labor union representing teachers in the US. The AFT which has over $800 billion in pension assets has blacklisted certain hedge fund managers and is aggressively advocating that pensions stop investing in hedge funds managed by these managers. Among the firms that figure in the list are well known names Appaloosa Management, Khronos, Tudor Investment, Third Point and SAC Capital. AFT’s beef is that these hedge fund managers take money from pension funds while associating themselves with groups advocating the elimination of traditional defined benefit pension plans. [EXPAND Read more]

Hedge Funds Blacklisted

In the AFT report titled “Ranking Asset Managers,”  sent to pension trustees who invest in hedge funds, there are 34 investment management firms blacklisted on concerns that fund managers in these firms are actively involved with groups against defined benefit pension plans. The hedge fund managers cited include Appaloosa Management president David Tepper, AQR Capital founding principal Clifford Asness, Centaurus Advisors founder John Arnold, Eagle Capital Management founder Ravenel Boykin Curry, Elliott Management founder Paul Singer, and Mason Capital principal Kenneth Garschina.

It addition, hedge fund manager Alan Fournier of Pennant Capital, Prescott Investors managing partner Thomas Smith, SAC Capital managing director Michael Sullivan, Third Point Capital founder Dan Loeb, Julian Robertson of Tiger Management, and Tudor Investment Corp. founder Paul Tudor are on the watch list.

Pension Funds, Hedge Funds Take Note

Commenting on the AFT report, Jay Rehak president of the Chicago Teachers’ Pension Fund says, “I have an issue with people thinking they can play both sides. They come to us with their hand out, and then they are stabbing us in the back.” Illinois State Board of Investment Executive Director William Attwood says the pension fund managers have a duty of loyalty to participating members, which may force the trustees to take a serious view of the issues raised in the AFT report.

Following the report, two prominent public employee funds are mulling a pull out of their investment from hedge fund Third Point. Illinois State Board of Investment which has $12.4 billion in assets and $31 million invested in hedge fund manager Dan Loeb’s Third Point Capital, wrote to its adviser EnTrust Capital, “It would be troubling and embarrassing to now find that one of the firms retained by Entrust on [our] behalf is using the fees paid by [our] participants to work against their interest.” Another investor in Third Point, the Ohio Public Employees Retirement System which has $72 billion in pension assets, has also expressed similar concerns.

For their part, hedge funds that landed on the watch list are also taking the report seriously to minimize the negative perception the report may bring among pension funds. In a statement, hedge fund manager Dan Loeb who was specifically targeted in the AFT report said he or the philanthropic organizations he leads have never taken a position against defined benefit plans. Loeb was cited in the report for his support to StudentsFirst, an education reform group that wants to get rid of defined benefits for teachers and other public employees.

Pension Funds Too Big An Opportunity To Ignore

Dan Pedrotty, one of the authors who prepared the watch list says the labor union will update the list at least quarterly. He also said AFT is considering implementation of a grading system to separate the worst offending hedge funds from the least.

Though pension funds are increasingly turning to hedge funds for higher yields to reduce massive unfunded liabilities of approximately $3 trillion, this report is likely to be viewed seriously by all hedge funds that target pension funds for investment capital. The California State Teachers’ Retirement System (CalSTRS) for example, manages a $165 billion pension plan for California teachers. It plans to increase its hedge fund allocation to 5 percent from its current 2 percent. Likewise, the $4.2 billion Milwaukee public pension fund is planning to invest in hedge funds for the first time. Given the potential for big business from pension funds, it is likely that hedge fund managers will play it nice and adopt a lower profile on activities that are viewed as hostile to traditional pension plans. [/EXPAND]