Archive for May 29th, 2011
In honor of those men and women who’ve given their lives in defense of our country, I’d like to call on the Memorial Day remarks of Presidents past:
From Ronald Reagan in 1988:
Once each May, amid the quiet hills and rolling lanes and breeze-brushed trees of Arlington National Cemetery, far above the majestic Potomac and the monuments and memorials of our Nation’s Capital just beyond, the graves of America’s military dead are decorated with the beautiful flag that in life these brave souls followed and loved. This scene is repeated across our land and around the world, wherever our defenders rest. Let us hold it our sacred duty and our inestimable privilege on this day to decorate these graves ourselves — with a fervent prayer and a pledge of true allegiance to the cause of liberty, peace, and country for which America’s own have ever served and sacrificed.
Our pledge and our prayer this day are those of free men and free women who know that all we hold dear must constantly be built up, fostered, revered, and guarded vigilantly from those in every age who seek its destruction. We know, as have our Nation’s defenders down through the years, that there can never be peace without its essential elements of liberty, justice, and independence.
The willingness of some to give their lives so that others might live never fails to evoke in us a sense of wonder and mystery. One gets that feeling here on this hallowed ground, and I have known that same poignant feeling as I looked out across the rows of white crosses and Stars of David in Europe, in the Philippines, and the military cemeteries here in our own land. Each one marks the resting place of an American hero and, in my lifetime, the heroes of World War I, the Doughboys, the GI’s of World War II or Korea or Vietnam. They span several generations of young Americans, all different and yet all alike, like the markers above their resting places, all alike in a truly meaningful way.
Winston Churchill said of those he knew in World War II they seemed to be the only young men who could laugh and fight at the same time. A great general in that war called them our secret weapon, “just the best darn kids in the world.” Each died for a cause he considered more important than his own life. Well, they didn’t volunteer to die; they volunteered to defend values for which men have always been willing to die if need be, the values which make up what we call civilization. And how they must have wished, in all the ugliness that war brings, that no other generation of young men to follow would have to undergo that same experience.
And from President Clinton, in 1994:
Here at Arlington, row after row of headstones, aligned in silent formation, reminds us of the high cost of our freedom. Almost a quarter of a million Americans rest here alone, from every war since the Revolution. Among them are many names we know: General Pershing, Audie Murphy, General Marshall and so many others.
But far more numerous are the Americans whose names are not famous, whose lives were not legend, but whose deeds were the backbone that secured our nation’s liberty. Today we honor them. We honor them all as heroes — those who are buried here and those who are buried all around the nation and the world.
If you look at the headstones, they don’t tell you whether the people buried there are poor or rich. They make no distinction of race, or of age, or of condition. They simply stand, each of them, for one American. Each reminds us that we are descendants, whatever our differences, of a common creed — unbeatable when we are united, one nation under God.
Last week, the Wall Street Journal reported that pensions are moving more money back into hedge funds:
Also, pension officials are using the historically strong returns of hedge funds to justify a rosier future outlook for their investment returns. By generating more gains from their investments, pension funds can avoid the politically unpalatable position of having to raise more money via higher taxes or bigger contributions from employees or reducing benefits for the current or future retirees.
The Fire & Police Pension Association of Colorado, which manages roughly $3.5 billion, now has 11% of its portfolio allocated to hedge funds after having no cash invested in these funds at the start of the year.
While pensions have been investing in private equity and what are called alternative investments for many years, hedge funds have represented a smaller part of their portfolio. The average hedge-fund allocation among public pensions has increased to 6.8% this year, from 6.5% for 2010 and 3.6% in 2007, according to data-tracker Preqin. (Emphasis added.)
PERA’s own investments in hedge funds are unclear from the latest data, but if the “Other of Other” category is representative, it could be about 10% of their holdings.
This may be good in the short run. There’s no doubt that some of these funds have done well, being able to hedge some of their risk away and focus on capturing industry or sector returns. But there are some serious dangers here, and they are complicated by the problems already noted with pension accounting.
First, there’s no such thing as risk-free alpha. Remember, the market tries to match risk with return. If someone is selling an investment with 10% return and the risk associated with equities, beware. Because if that were possible over the long run, enough people would pull money from equities and pile it into this mythical investment, so the returns would match. Either that, or there’s hidden risk in there that justifies the extra return.
Either way, in the long run, the funds are taking on more risk, or will have the additional return arbitraged away as more people invest in these strategies. Also, if many of the funds are using the same strategy, it may be difficult for them to execute trades that actually allow them to limit risk, as they may all be trying to sell overperformers, or buy hedges, at the same time.
Another threat to pension funds is in the bolded sentence above. Managers are not only using these returns to justify higher projected returns. What goes unstated is that they’ll also use them to justify the higher discount rates, that make their pensions look better-funded than they are. It’s a perfect example of the perverse accounting incentives built into fund management.
Last, these strategies are not necessarily transparent, making it difficult for independent auditors to even assess the risk that these pensions are taking on.
I’m all for finding ways to hedge away risk, and there’s no reason that pension funds can’t participate in some of those techniques. I’m skeptical that, in the absence of fixing the underlying problems, this approach is going to do any more than paper over problems, yet again.
So thinks a liberal Democrat friend of mine who told this story to bolster her point. She has family in Borough Park, Brooklyn, and at a lunch, or a meeting, or something, one of her relatives got into a discussion about the welfare state. Turns out that virtually every one of the people he was talking to: 1) were voting Republican because they’re against the welfare state, and 2) are on Section 8 assistance. Her point was that the Republicans were “geniuses” for getting the lower-middle class, virtually all of whom are on some sort of government assistance, to, in her words, “vote against their interests.”
That’s true, if you believe that “their interests” constitute continuing dependence on the government. If you go with the fixed-size-pie vision of the world, then this might make some sense. But in reality, it’s yet another reason for the Republicans to focus on growth, at the same time we’re trying to cut spending and deal with entitlements. The two programs are complementary: cutting the size of government in the right places will boost economic growth, lifting more people out of poverty.