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State reveals offshore investments

Posted: Monday, June 07, 2010

Alaska's public investment managers have revealed their hedge fund investments for the first time, following through on a pledge they made a year ago.

The state's Permanent Fund and its public pension funds have made partial details public of the almost $3 billion invested in hedge funds.

Those are the sometimes secretive investments available only to sophisticated investors like the $35 billion Permanent Fund and the $17 billion Public Employee Retirement and Teacher Retirement Systems. They are managed by the Alaska Retirement Management Board.

Most of the hedge funds are held by the Permanent Fund, which has more than $2.2 billion in them, while the ARM Board has more than $500 million worth.

The newly released hedge fund information shows the funds have hundreds of millions of dollars of that invested in offshore investment funds, mostly in the Cayman Islands or similar tax havens.

Fund managers say they did not specifically seek out the offshore funds, but state money was placed there by external fund managers contracted by the state.

"We're just looking for the best managers, whether they are onshore or offshore," said Mike Burns, executive director of the Alaska Permanent Fund Corp.

Offshore or overseas funds are typically used by investors trying to avoid taxes, either legally or illegally, but tax benefits were not the state's intent, said Burns and Gary Bader, chief investment officer for the Department of Revenue.

"There are tax reasons for some people, but that's not our motivation because we're not a taxpayer," Burns said.

Bader, though, said there were still some benefits, because investing in such tax havens means fund managers don't need to worry if their investments will be inadvertently taxed.

He described the offshore investments in tax havens as an "abundance of caution."

"We take the position that we're not subject to the tax, but it is important to not even have it raised as an issue," Bader said.

They don't take similar steps with the retirement funds' other investments, he said.

Offshore hedge funds, many of which are controlled by U.S. companies but are legally based in a post office box in foreign countries that offer financial secrecy, are intended to avoid taxes, Bader acknowledged.

"That's the main reason people go offshore with funds, to avoid some possible taxation issues," he said.

Burns said he didn't know specifically why the Permanent Fund was invested in the Caymen Islands, and that such decisions had been made by outside investment advisors known as "fund of fund" managers.

"We're agnostic" about where the hedge funds are based, Burns said.

Despite many of the hedge funds being legally based in foreign countries with different laws, both Bader and Burns denied that presented any additional risk to the state.

"I'm not aware of any downsides, we've not experienced any downside in any of our funds," Bader said.

Burns said the state uses reputable outside advisors to select hedge funds and there is no risk from being located offshore instead of in the United States.

"We go through the fund of fund process, they are evaluating the systems and risk of the these things," he said. "The answer from our fund of fund people would be 'No', they're equal across the board."

The permanent fund and retirement funds previously kept secret where they invested, saying that secrecy was needed to get top fund managers to agree to manage state money.

That changed after the stock market declined in 2008, when even the elite hedge fund managers wanted access to the state's money more than they wanted secrecy.

Burns and Bader said in early 2009 that they were implementing new openness policies, and were no longer agreeing to secrecy as part of hedge fund deals.

Doug Bratton, of Crestline Investors, one of the fund-of-fund managers hired by the state to place money in hedge funds, told the ARM Board recently that Alaska had made the right decision in demanding openness.

"It's your money, you deserve to know how it is managed, you deserve to know what we're doing with it," he said.

Bader and Burns said in 2009 it would take a year to ensure that all new hedge fund contracts guaranteed openness. That process has now been completed, and they released the list of their hedge funds to the Empire recently under a public records request.

Bratton said only a single ARM Board fund had balked at the disclosure requirement, and that that fund's performance meant it was already being considered for cancellation.

While the Department of Revenue, which handles ARM Board investments, and the Alaska Permanent Fund Corp. released under the Alaska Public Records Act the list of hedge funds in which they are invested and the dollar amounts held in each, both declined to release information about how much they'd made or lost in each fund.

Releasing that information could reveal individual hedge funds' investment strategies, which is sometimes a closely guarded secret.

Bader said releasing that information would "conflict with the (ARM Board's) contractual provisions and could affect the value of investments by the board or impair the ability of the board to acquire, maintain, or dispose of investments."

Burns made a similar claim that making return information public could hurt the permanent fund.

In general, since hedge funds investments began about 4 years ago, they've not performed as well as expected, Burns said.

"Of course, nothing's been very good over the last four years," he said.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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