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Pension Funds Learn their Lessons

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I apologize in advance for posting a story regarding economics two days in a row but this just pissed me off too much to not rant about. The Wall Street Journal had an article regarding the rapid growth of Hedge Fund investments. The best part of the article though was describing where the growth was coming from:

Pension funds and other large institutional investors may earmark an additional $1 trillion toward hedge funds as they grow more comfortable with the different risks posed by those strategies.

Really? I just don't know what to say but I'll try. Pensions funds were one of the groups hardest hit by the housing bust, losing almost a quarter of their value in 2008 alone. It wasn't reported, but these pension shortfalls led to many of the budget problems that the states experienced (For more information of the impact of pension funds on state budgets, read Matt Taibbi's Griftopia.)

Now in hindsight these Pension Funds invested in mostly the "safe" AAA CDO mortgage packgages that ended up blowing up in their faces. Still, these were far safer than doing bets on Hedge Funds whose investments are often are hovering right above junk status. Doesn't matter though, cause there are yields to be gained and the great yields are in Hedge Funds.

So why would Pension Fund managers, just a few years from losing a quarter of their worth, go back into even riskier investments then they were in during the previous crash? Its simple, the pension fund manager is paid a commission on the gains they make while controlling the portfolio of investments. Why wouldn't they invest in the highest yield investments? Sure, they are probably short term and hold considerable risk. This doesn't matter though cause with interest rates so low money is easy to borrow and the manager knows that there is significant commissions for them to make if they take on the risk. Of course, they also probably understand that if the investment goes in the toilet they already got the commissions for the previous gains so who cares about the long term effects of the investment.

I feel this mentality will certainly blow up in the faces of all these pension funds, and the best part is that the managers will have already cashed out by the time actual chickens come home to roost. Remember, these people aren't in it to do good business, but to make the biggest gains possible in the shortest amount of time. With stories like these, its apparent that this approach isn't going away anytime soon.