A derivatives overlay Zimmerman Investment Management Co., Chicago, reduced returns of the Teachers' Retirement System of Illinois, Springfield, by $179 million in the two years ended June 30, 1996, a state audit says.
But fund officials and Thomas Zimmerman, chief executive of ZIMCO, said it's more appropriate to view the options program in tandem with the underlying assets. Doing that, the system shows ZIMCO losing $46 million on an absolute basis.
Mr. Zimmerman was chief investment officer at the system, but left to form ZIMCO in 1994.
Current CIO Don Nesbitt said it's easy to look with hindsight: "If you want to carry this to the extreme, someone could say we should have been 100% in stocks in 1995, when returns were 40%."
He said fund officials did the best they could in choosing to hedge, and in recent markets, the overlay program would have performed much better.
The state auditor's office compared ZIMCO's performance with customized benchmarks used for calculating performance fees. The benchmarks took into account that Zimmerman was hedging, and would produce negative returns in up markets.
But Mr. Zimmerman said the auditor's method is appropriate only when looking at a full market cycle, not a two-year cycle. He said that in the time he was managing overlays, both internally as CIO and as an outside manager, he produced more than $95 million in gains.
ZIMCO was terminated in November with the rest of fund's overlay managers following a review by its consultant, Callan Associates Inc., San Francisco.
The audit was conducted by KPMG Peat Marwick L.L.P.