July 30, 2014

Elyria
Mostly cloudy
74°F
test

Critics wary of universities’ plunge into hedge funds

COLUMBUS – Ohio`s universities are increasingly risking surplus money from taxpayers, tuition and other sources in hedge funds, but critics say they`re wary of the unorthodox investment strategies used by the unregulated private investment plans.

After a 2002 change to state law, universities have invested heavily in the funds, pushed by the lure of higher, supposedly more stable returns. Universities use money from privately funded endowments for investments, and surplus operating cash from tax receipts, student tuition payments and other university operations.

Miami University and Ohio University each have about 16 percent of their total investment portfolios in hedge funds, and this year Ohio State University doubled its investments in the complex funds to about 14 percent of its total.

Hedge funds, which consistently deliver double-digit returns, may act as a kind of insurance against downward swings in the stock market, school officials said. When the market does well the returns are smaller, but “when things are going bad in the stock market, this is to help us have a more stable investment,” said Tom Johnson, interim treasurer at Ohio State.

Losses, however, could be catastrophic. Moody`s Investor Services sent a report to university clients in August, warning them of such losses. In July, Sowood Capital lost more than $1.5 billion, including $350 million of Harvard University`s endowment and about a year ago, an Amaranth hedge fund speculating in natural-gas futures collapsed, losing more than
$6 billion.

It`s difficult to know the value of hedge funds day-to-day, and many hedge funds give themselves “significant discretion in valuing securities,” according to the U.S. Securities and Exchange Commission Web site. Hedge funds are also not required to disclose all of their holdings.

“On any given day, do we know what all of the positions are? No,” said Bruce Guiot, director of investments and treasury services at Miami University. “We don`t have that level of transparency.”

At Ohio State, officials have no access to the university`s hedge funds` underlying investments and rely solely on the funds themselves for valuing the investments, according to a report by auditors Deloitte & Touche. The company warned Ohio State that its increased use of hedge funds and venture capital has brought with it “greater risk and new challenges.”

The university has since hired a consultant and assigned a staff member to value its 12 hedge-fund investments and is attempting to protect itself by spreading investments across multiple managers that employ differing strategies.

Still, the fear remains that the funds` estimates of their worth could be more than the price their investments fetch when they try to sell them.

Some Ohio lawmakers are worried universities might suffer a similar fate to the Ohio Bureau of Workers` Compensation.

In 2004, the bureau lost $216 million, or 96 percent of its investment, in a hedge fund that made bets on interest-rate movements with borrowed money.

State Rep. William Batchelder is now pushing legislation that would limit the bureau`s ability to make high-risk investments.

“Nobody with any type of middle-class values would do that with their investments, the Medina Republican said. “It`s like going to Las Vegas.”