The $26.2 billion South Carolina pension fund, which raised its holdings of alternative assets to about 40% of its portfolio in fiscal 2011 from nothing in 2007, is re-evaluating the costs it incurs and demanding a better accounting of expenses, Mr. Loftis said.
Mariner’s contracts with South Carolina “have recently been renegotiated to ensure alignments of interest and a fee structure commensurate with the desired risk and return profile of the investments,” Adam Jordan, chief of staff for the state’s investment commission, said in an e-mail.
Texas’s Permanent School Fund, an endowment established in 1854 to benefit public education, may hire in-house money managers because returns are being “eaten alive” by hedge fund fees, its chief investment officer said in January.
Earlier this month, Joseph Dear, chief investment officer of the $229.4 billion California Public Employees’ Retirement System, said he wasn’t willing to pay hedge fund managers the standard 2% fee, plus 20% of profits, if they don’t beat the market.
“Hedge funds, given their poor performance over the past few years, the fee structures are being called into question,” said Andrew McCollum, a consultant with Greenwich Associates based in Stamford, Conn. “Over time, we will achieve equilibrium. I don’t think we’re there yet.”
While total fees have tripled in the past three years, South Carolina’s pension returns have sometimes been lower than those for funds of comparable size.
For the three years ended June 30, 2011, South Carolina’s pension returned 3.1%, not including fees, compared with about 3.9% for public funds with assets greater than $5 billion, according to the Wilshire Trust Universe Comparison Service.
South Carolina’s pension jumped into hedge funds, private equity and other alternative investment strategies under its former chief investment officer, Robert Borden.
Mr. Borden said cutting the fund’s allocation to stocks to about 30% from about 60% made it less risky. On a risk-adjusted basis, South Carolina’s was the best-returning pension fund, he said in a telephone interview.
It’s not fair to judge the pension’s performance based on one snapshot, he said. For the three years ended Dec. 31, 2011, South Carolina’s pension returned 12.1% compared with about 10.4% for similar public funds, according to Wilshire TUCS.
“When you have periods where the equity market rallies up sharply, anybody who’s got that long exposure experiences good performance,” Mr. Borden said. “The portfolio is positioned to be very defensive against equity market sell-offs.”
Mariner, based in Harrison, N.Y., manages $4.7 billion and has a multistrategy approach focused on fixed income and credit arbitrage. The firm, which also manages money for the $15.59 billion New Mexico State Investment Council, has 180 employees. Mr. Michaelcheck didn’t return telephone calls seeking comment.
A lack of transparency regarding the underlying assets held by alternative mangers, and fee arrangements hidden from the public eye, present a danger to retirees and taxpayers, Mr. Loftis said. The treasurer said the investment commission has denied requests for records, including a detailed accounting of expenses.
Mariner’s $38 million in fees are equivalent to the average annual pension benefit paid to 2,000 of the South Carolina pension’s retirees.
“You can’t explain this to a non-Wall Street person,” said Mr. Loftis. “If I’m going to pay a bill, I want to know what I’m paying.”
South Carolina’s financial well-being trails by other measures as well. Compared with a year ago, the state ranked 14th worst in economic health at the end of the fourth quarter among U.S. states and the District of Columbia, according to Bloomberg Economic Evaluation of States data.
Mr. Borden, who joined the South Carolina fund in 2006 after serving as the investment chief of the Louisiana State Employees’ Retirement System, was charged with diversifying the Palmetto State’s pension system following a November 2006 legal change allowing it to invest in assets other than domestic stocks and bonds.
Mr. Borden resigned in December and now works for Delegate Advisors LLC, a financial adviser based in Chapel Hill, N.C.