US - Potentially massive pension fund losses incurred through hedge fund investments could "put the retirement security of American workers in jeopardy", senator Chuck Grassley, chairman of the committee on finance, has warned.
In a letter to the Treasury Department, Grassley said such investments also posed the risk of further losses to the Pension Benefit Guaranty Corporation (PBGC), and added he was "deeply concerned" about the lack of publicly available information regarding hedge funds.
"I am particularly concerned that tens of millions of Americans may be unwittingly exposed to hedge fund investments through their participation in public and private pension plans, and yet would have no way of knowing it."
Grassley said hedge funds were not subject to disclosure and transparency rules that applied to other financial intermediaries in spite of their major presence in financial markets, and claimed they were permitted to operate "almost completely unfettered" by government oversight or regulation.
"In recent years, news reports have alerted the public to a number of high-profile collapses of large hedge funds. In many cases, these collapses have been accompanied by criminal activity," Grassley said in the letter, which was also sent to the heads of the PBGC and the Securities and Exchange Commission.
He called on Henry Paulson, US Treasury Department secretary, to divulge what information, if any, hedge funds were required to report to the Department.
"I also would appreciate your views on how Congress could improve hedge fund transparency."
The stinging criticism came in the wake of the much publicised collapse of Amaranth Advisors, which cost various pension funds millions of dollars, most notably the the US$7bn San Diego County Employees' Retirement Association (SDCERA), which lost over $100m alone.
Yet despite the bad publicity created by Amaranth's collapse, institutional investor demand for hedge funds continues to skyrocket. According to the Bank of New York, institutional demand for hedge funds is set to triple to over US$1trn by 2010, largely led by pension funds seeking new asset classes to better match their growing liabilities.
In a study of over 100 clients, BNY found institutional investors would account for more than 50% of the total flows into hedge funds through 2010, with pension plans representing 65% of institutional flows.
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