By Mary Lynne Dahl
February 28, 2006
On November 28, 2005, my husband and I wrote a letter to every Alaska senator and representative, in which we were critical of the move to invest Permanent Fund money in hedge funds. To date we have heard from 1 senator and 4 representatives in response. All were in agreement with us that hedge funds are risky and not appropriate as investments in the Permanent Fund. Representative Ethan Berkowitz, of District 13, wrote back to us in January of 2006, and included a copy of a response he got from Mike Burns, Executive Director of the Permanent Fund. In that response, Mr. Burns quoted AS 37.13.200, the state law which he says mandates that certain investments be kept secret. Our criticism is two-fold; first that it is inappropriate to invest public money in hedge funds specifically because they are secret, and secondly that the statute allowing this interpretation for this secrecy should not be allowed. In other words, it should be rescinded.
If hedge funds, private equity investments and other alternative investments are allowed, the secrecy will not only continue, but increase. This is wrong, particularly with public money. In addition, these kinds of investments are the highest risk among most types of investments. Currently the Securities Exchange Commission has over 50 hedge funds being investigated for fraud. One reason that fraud is so common among hedge funds is the secrecy that they require.
In addition, hedge funds and private equity investments typically run for 5-7 years before they pay out the profits they project, during which time they generally do not pay dividends, earnings or profits. So, if a significant percentage of the Permanent Fund is invested in this high-risk category of investments, which pay no earnings for 5-7 years, that portion of the Permanent Fund will not have earnings on which to base the dividend paid annually to Alaska residents. That means that the dividend paid to Alaska residents could decline. My professional opinion, after 21 years as an investment advisor, is that this is not prudent.
The Permanent Fund trustees are subject to strict fiduciary standards of responsibility. In August of 1994, Uniform Prudent Investor Act was drafted and recommended for enactment in all 50 states. Alaska Permanent Fund trustees make reference to their goal to adhere to the fiduciary standards of this act, but do not do so, in fact, when they allow hedge fund investing, private equity investing and instruct the management of the Permanent Fund to do so in secret, citing state law that allows it. This is not only imprudent, it is arrogant to the extreme.
The Certified Financial Planner®
Code of Ethics, a professional standard of behavior for professional
investment advisors, states that the prudent investor rule (as
referenced above in the Prudent Investor Act of 1995) requires
a higher level of sophistication , since it is based on Modern
Portfolio Theory, a complex system of mixing investments based
on very technical risk/return analyses. As a result, it implies
a higher fiduciary standard of care, which I believe our Alaska
Permanent Fund trustees are ignoring. The same code of ethics
for financial planners states further that the trustee is required
to verify that all reporting and disclosure requirements are
satisfied by the plan on an annual basis . How can the Permanent
Fund do this when any percentage of the Perm Fund investments
are kept secret? How can it value those secret investments for
calculating the annual percentage to be paid out using the Percent
of Market Value method now in place, which is also the res!
Ethics involves principles of right or good conduct and their effects on other people. The business of investing other people s money, as in the Alaska Permanent Fund hinges on trust; trust between the trustees, the staff of the Permanent Fund, the investment advisors and investment professionals paid by the Permanent Fund and the beneficiaries of the Permanent Fund, the people of Alaska. I for one, as one of those people, do not trust a management board that arrogantly insists on investments that are kept secret and are, without doubt, higher risk than is necessary or appropriate.
I do not want to find out that one of these hedge funds or private equity investments loses money or is involved in fraud or any kind of self-dealing. I do not want to hear a lame excuse in 2 years that the Permanent Fund dividend has been reduced because 10% of the investments are in secret hedge funds or private equity investments that have yet to pay any earnings or profits. Of course, if that happened, chances are we would never know, because it would be a secret.
Mary Lynne Dahl
and do not necessarily reflect the opinions of Sitnews.