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Pension Funds

Davidson Kempner severs ties with Kentucky Retirement Systems

Hedge fund manager Davidson Kempner Capital Management has terminated its relationship with the Kentucky Retirement Systems, Frankfort, said David Eager, executive director.

Mr. Eager said the money manager notified the pension fund of its resignation this spring after expressing concerns about a 2017 pension transparency law that asked managers to abide by CFA Institute codes of ethics and professional conduct as well as a lawsuit filed against other KRS hedge fund managers by state employees at the end of 2017. It managed $68 million for the pension fund.

The lawsuit alleged that three KRS hedge fund managers — KKR Prisma, Blackstone Group and Pacific Alternative Asset Management Co. — breached their fiduciary duties by misrepresenting expensive and risky "black-box" bundles of hedge funds as safe ways to generate high returns. Instead, those investments contributed to the pension system's virtual insolvency, the plaintiffs said, while the managers pocketed excessive fees. KKR and PAAMCO merged last year to form a new hedge fund-of-funds firm, PAAMCO Prisma Holdings.

Mr. Eager said no other existing KRS managers have terminated their relationship with the $12 billion pension fund over these issues, although one firm did decline to be considered as a manager after it was advised of the new code of ethics requirements, Mr. Eager said. He declined to identify the manager.

Officials at Davidson Kempner could not immediately be reached for additional information, including whether the firm is a CFA member.

The 2017 pension transparency law requires all KRS managers to comply with the CFA's code of ethics and professional conduct, regardless of whether they are CFA members. The codes require managers to put clients' interest first and avoid conflicts of interest, among other things. Mr. Eager said the retirement system has been in the process of making sure its managers are in accordance with the codes.

It has not been determined where the redeemed Davidson Kempner funds will be placed, Mr. Eager said. KRS has been in the process of reducing its hedge fund allocation to 3% from 10% of the total fund.

Bloomberg contributed to this story.