Fraud inquiry hasn't scared off Seattle from investing in hedge funds

Thursday, September 11, 2003

By HUI-YONG YU
BLOOMBERG NEWS

Pension funds for workers in the city of Seattle, like others in California and Virginia, are planning to increase their investments in hedge funds, undeterred by recent reports of illegal -- and costly -- trading now under investigation by New York Attorney General Eliot Spitzer.

Spitzer last week said hedge funds have circumvented rules designed to prevent short-term trading and after-hours trading of mutual fund shares. So far, Spitzer has only charged managers of the Canary Capital Partners LLC hedge fund with wrongdoing.

The charges by Spitzer emerge as the Securities and Exchange Commission steps up its review of the $665 billion industry to determine whether more oversight is warranted. The number of fraud-related cases against hedge funds, loosely regulated investment portfolios that bet on falling as well as rising securities prices, doubled to 12 last year.

Despite that, the Seattle City Employees' Retirement System intends to boost its investments.

"We're still interested," said Norman Ruggles, executive director of the Seattle City Employees' Retirement System. The pension plan has about $57 million invested in hedge funds through Quellos Group LLC. Seattle City Employees' has a goal of putting as much as 7 percent of its $1.4 billion in assets in so-called alternative investments, Ruggles said.

The California Public Employees Retirement System and the Virginia Retirement System each plan to allocate as much as $1 billion to hedge funds.

That's a continuation of a trend in which pension funds have been stepping up investments in hedge funds after three years of stock market losses left them with shortfalls to cover benefit payments to retirees. Hedge funds attracted a net $20.8 billion in the first half of this year, surpassing the $16.2 billion for all of 2002, according to Tremont Capital Management in Rye, New York.

Hedge funds have attracted more attention from regulators as the industry's assets swelled 40 percent during the past three years. Spitzer announced Sept. 3 an inquiry into "illegal trading schemes" that he said allowed hedge funds to buy mutual fund shares at prices unavailable to most investors.

The California pension plan recently has held off on committing more cash to hedge funds, said Brad Pacheco, a spokesman for the plan. This isn't because of Spitzer's inquiry. "We are seeing a lot of money flow into the industry quickly, so our staff is being cautious," he said.

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