By Joshua Krause
For decades, local and state governments in the United States have made promises to their employees that they cannot keep. They guaranteed a certain level of income to retirees at a time when America was its most prosperous, and when most people didn’t live as long as they do now. Those lucrative pensions they promised are starting to catch up to them in a big way.
Earlier this week, Moody’s cut Chicago’s credit rating to “junk,” largely due to their $20 billion pension shortfall, and they put the City of Houston on notice. Many of the major pension funds use the stock market to bolster their savings, but despite record profits on Wall Street, it doesn’t seem like any of them reached their revenue goals. California’s Public Employees Retirement System only reached a third of the annual revenue they projected, and the state’s teacher fund failed to reach their goal. Overall, Moody’s found that the 25 largest public pension funds in the US have a $2 trillion budget shortfall.
That means that many state and local governments may face credit rating cuts in the near future, which will leave them owing even more money. Chicago, for example, is now paying an exorbitant 8% yield on their bonds, which amounts to almost twice as much as a homeowner would pay for a 30-year mortgage. If other cities have to deal with credit rating downgrades (which they soon will), paying off their liabilities will quickly turn into a Sisyphean task. Widespread municipal bankruptcies will soon become a common feature in America’s financial landscape.
Take a look at how heavy America’s debt burden has become.
Joshua Krause is a reporter, writer and researcher at The Daily Sheeple. He was born and raised in the Bay Area and is a freelance writer and author. You can follow Joshua’s reports at Facebook or on his personal Twitter. Joshua’s website is Strange Danger .
Despite the subpar returns, hedge funds now manage $2.845 trillion, up from $1.6 trillion at the end of 2009, HFR says. Insurance companies, pension funds and other institutions keep shoveling money at hedge funds. However, the largest US pension fund, CalPERS, turned its back on hedge funds in a much-publicised decision last year. Several prominent US public pension funds are reviewing their alternatives strategies given CalPERS’ decision, which was prompted by concerns overly high investment fees, as well as the fact that hedge funds’ often complex and opaque trading strategies. Hedge funds offer excellent portfolio diversification benefits but when a $US298 billion fund exits the sector, it demonstrates just how challenging the hurdles are to surmount.
Hedge funds did outperform plummeting share markets as the global financial crisis wreaked havoc in 2008 but still lost a hefty 18.8 per cent, according to the CS Tremont Broad HF Index. Meanwhile, hedge fund returns have been in the low single-digits as equity markets have surged in recent years.
For many investors, their hedge fund allocations have simply dragged down total portfolio returns while providing no certain protection against falling markets, prompting questions similar to CalPERS: can I meet my investment objectives with more certainty, less cost and by using less-risky structures?
It is no simple task to grasp the underlying drivers of a hedge fund’s strategy – the drivers which control the levers to risk and return – but the skill used to generate those returns is also now being increasingly questioned by academics and industry participants.
http://ioandc.com/hedge-funds-losing-appeal-for-big-pension-funds-says-milliman/
Worry not. Taxes and death panels will take care of this one.