In mid-December a letter tacked a bitter ending onto an already dismal year at the Tulare County Employees’ Retirement Association. Geneva-based Union Bancaire Privée, one of the two funds of hedge funds with which the $710 million system had invested, wrote to regrettably inform Tcera that it was among the victims of Bernard Madoff’s purported Ponzi scheme. The Visalia, California–based pension plan’s share of the losses was about $1.13 million.
The hedge fund that linked Tcera to Madoff was J. Ezra Merkin’s Ascot Partners, one of UBP’s underlying funds and one of the key feeder funds to Madoff. (Ascot invested — and presumably lost — $2.5 billion with Madoff, much of it pension and endowment money.) Because of that connection and the fund of funds’ resulting loss, UBP explained, it would allow investors until January 23 to file for redemptions that would be honored at the end of March. Tulare County, which is just north of Los Angeles, wasted no time filing a request to redeem its full $20 million mandate with UBP, though retirement administrator David Kehler says Tcera may rescind the request before spring, but only if UBP can provide satisfactory answers to Tcera’s many questions.
“Why were there other managers that seemed to shy away from investments that involved Bernard Madoff, but UBP felt comfortable moving forward?” he asks. “How did this get missed?”
The Madoff scandal came in a year in which Tcera’s assets shrank by 28.7 percent. It also coincided with the final stages of an in-house asset-liability study of the retirement system. Assets are currently divvied up among seven classes: domestic equity (27.8 percent), international equity (14.6 percent), fixed income (31.7 percent), real estate (17.1 percent), private equity (2.9 percent), hedge funds (5.7 percent, with these assets split equally between fund of funds managed by UBP and Aetos Capital) and cash equivalents (0.2 percent).
Hedge funds haven’t lost all their appeal for Kehler, who assumed his role at Tcera 11 years ago after a stint in the benefits division of the Orange County Employees Retirement System. He notes that depending on the results of the forthcoming study, it’s conceivable that Tcera would even increase its allocation. “I don’t think we’re totally soured on hedge funds simply because of what has taken place with UBP,” says Kehler, who adds that he and Tulare County’s nine-member retirement board will nonetheless approach the subject with a fresh air of caution. “We’re going to have to feel comfortable that the asset class as a whole is able to provide due diligence and stronger transparency.”
