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University Of California's Hedge Fund Investments Plagued By High Fees

SAN FRANCISCO (CBS SF) -- The University of California paid hedge fund managers about $1 billion in fees over the last 12 years, according to a white paper study released by the university system's largest employee union.

AFSCME Local 3299 announced Tuesday the release of a white paper study highlighting what they say is the lack of transparency and lack of returns associated with the university system's current hedge fund investment plan.

The union, which represents more than 22,000 employees at the university's 10 campuses and numerous other centers, clinics and labs, states that the university's "experiment" with hedge fund investments "has fallen far short of the expectations on which they were sold" and wasted money on performance and management fees "for returns that largely mirrored the stock market."

The S&P 500 Index, which is considered a measure of the American stock market based on the market value of 500 large public companies, outperformed UC's hedge fund investments by more than 52 percent over the last 12 years, according to the study.

The University of California Board of Regents appointed Jagdeep Singh Bachher as chief investment officer and vice president of investments in 2014 to oversee their investment strategy and approved his annual base salary of $615,000.

Bacher said last year, that the University of California Retirement Plan funds are invested 55 percent in publicly traded stocks, 22 percent in bonds and 23 percent in alternatives, including real estate, hedge funds and private equities.

AFSCME Local 3299 President Kathryn Lybarger said the study, entitled Missing the Mark: How Hedge Fund Investments at the University of California shortchange students, staff and California taxpayers, raises important questions about whether recent tuition hikes and pension cuts in the UC system could have been avoided or minimized.

Lybarger said the university community needs "higher levels of transparency and stakeholder engagement in UC investment practices to ensure that the hard earned dollars of UC students, staff, donors, and California taxpayers are being managed in a cost-effective fashion. UC's hedge fund investments have fallen far short of this standard."

The study focused on about $6 billion in hedge fund investments that UC currently holds in its $55 billion University of California Retirement Plan and $8.9 billion General Endowment Pool. The study found that the university paid hedge fund managers a dollar in fees for every two dollars generated in net returns.

It also found that in the 2014-2015 fiscal year, the $4.8 billion UC invested in hedge funds through its retirement and general endowment plans, generated an estimated total of $158 million in fees for hedge fund managers.

"UC paid a billion dollars in fees for returns that largely mirrored the overall stock market," according to the study.

Thomas Gilbert, an assistant professor of finance & business economics at the University of Washington's Foster School of Business is quoted in the study, saying that the situation has been "compounded by enormous fees which come at the expense of the UC's stakeholders."

Union officials say that in the last 12 years, UC student tuition has increased three-fold while academic services have been cut and staff have been asked to contribute more into their pensions.

The white paper was released as UC officials consider a new round of pension changes, according to union officials.

Joe Kiskis, vice president of the Council of UC Faculty Associations said, "More pension cuts could do irreparable damage to UC's ability to attract world class faculty, doctors and researchers."

"Before any such actions are considered, UC has a responsibility to its students, staff and taxpayers to provide more transparency around its investment holdings, and more stakeholder engagement in the way these assets are managed," Kiskis said.

The study recommended that the UC Board of Regents require full public fee disclosure from hedge fund managers and consultants dating back to 2003 and conduct an asset allocation review to examine less costly investment approaches.

By Hannah Albarazi - Follow her on Twitter: @hannahalbarazi.

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