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By Marine Cole
October 22, 2007
Standard & Poor's is moving a step closer to incorporating enterprise risk management in its criteria for rating the credits of non-financial companies, raising concern among some executives that their debt ratings could suffer if the agency finds holes in their risk management practices.
By Andrew Osterland
October 22, 2007
If the investment "superfund" envisioned by Treasury Secretary Henry Paulson and the country’s biggest commercial banks doesn’t kick-start stalled credit markets, auditors conscious of their own legal liability may soon force a day of reckoning on banks and other financial institutions.
By Marine Cole
October 22, 2007
The jumbo cash pile proposed earlier this month to purchase assets from structured investment vehicles, or SIVs, isn’t just a bailout for banks but an effort to avert a financial crisis that could take down the economy.
By Matthew Quinn
October 22, 2007
Gary Crittenden agreed to fill the vacant Citigroup CFO job in February and promptly walked into the teeth of the financial world’s goriest buzzsaw. Not only did he join amid a chorus of calls for the banking behemoth to break up, but the worst credit environment in a decade was about to begin.
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Market chaos testing pension managers
Headlong rush into alternatives like hedge funds hits wall as plan sponsors reassess risk, rewards
September 17, 2007
Defined-benefit pension plans have spent the last few years recovering from the collapse of the tech bubble. Now plan sponsors are watching as the credit crunch undermines not only equity prices, but also the alternative assets that many plans have piled into, like private equity and hedge funds.
Michael Wright, a principal at Buck Consulting, said that while it’s far too early for plan sponsors to have made any changes in their asset allocations in response to the recent market moves, he is seeing nervousness among plan sponsors who were considering putting assets into alternative investments.
While plans have done stress testing of 130/30 funds or the arbitrage strategies used by hedge funds, “certainly what has happened in the last few months, the volatility that came through here, was outside the parameters of the model,” Mr. Wright said. “People who were thinking of putting those in, that’s where we hear ‘We need to reassess this.’”
“I know of at least one plan sponsor,” he added, “that was going through a total bundled-vendor search and said, ‘We want to test this without the hedge fund and some of the commodity exposure.’”
Mr. Wright said some plan sponsors have been surprised to see where problems showed up in their holdings, as the subprime fallout affected not only mortgage-backed securities but the stocks of financial firms and home builders.
“When you do an asset/liability modeling study for a large plan sponsor after this event,” he said, “the correlation assumptions about asset classes are going to be questioned.”
In recent years, pension plans have increasingly adopted alternative investments in the hopes of boosting their returns and lowering the overall volatility of their portfolios. Greenwich Associates data show that 35% of U.S. corporate plans invested in private equity in 2006, up from 33% in 2005, while almost a quarter invested in hedge funds, up from 21% in 2005.
The credit crunch has cast a pall over private equity in particular, since the success of PE firms in recent years rested in large part on their access to cheap credit.
Mark Ruloff, director of asset allocation for Watson Wyatt’s investment consulting group, argued that the impact of tighter credit will be greatest on the PE outfits doing the biggest deals.
“The private equity managers who have been focused on large mega-buyouts will not have the same opportunities in the future because of current credit conditions,” he said. “That would have to be factored into the process when you decide which managers to go with.”
But the time frame for investing in private equity rules out any quick moves by plan sponsors. “Trying to think about getting in or out of private equity isn’t on the table,” Mr. Ruloff said. “Basically, you make a long-term commitment and there’s a long drawdown period.”
The market turmoil has also resulted in some well-publicized meltdowns of hedge funds. And while hedge funds outperformed equities in July, recent numbers show they lagged in August, with Hedge Fund Research reporting a 1.3% decline in its composite index of hedge funds.
But Michael Schlachter, a managing director at Wilshire Associates, argued that since there tends to be a hedge fund blowup every six months or so, the hedge fund problems that have surfaced in recent months shouldn’t have come as a surprise to plan sponsors.
“People who were investing in hedge funds in the last year or so were aware of Long-Term Capital, aware of Beacon Hill, of Amaranth,” Mr. Schlachter said, citing three famous hedge fund collapses. “This is not a new phenomenon. The fact that the last few months have had a few high-profile downfalls is not exactly out of the ordinary.”
More generally, Mr. Schlachter argued that plan sponsors do not react to short-term market moves. “They realize that markets go up and down, and they make their decisions for the long run,” he said.
In fact, the recent market volatility highlights the benefits of having a diversified portfolio, said Christopher DeMeo, director of investment strategy for Russell Investment Group.
“Overall, hedge funds are potentially a very attractive asset class given their risk/reward profile and the diversification benefits,” Mr. DeMeo said, adding that “because private equity provides some potential to take advantage of illiquidity premiums, I think private equity continues to play a role for a lot of our clients.” FW
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