November 28, 2005
Monday

The Trustees of the Permanent Fund have decided that it is ok to invest in Hedge funds. Before they do, they should review the "Prudent Man Rule".

Hedge funds are designed to provide high returns by taking higher risks, using leverage, options trading, and swaps or combinations of these and more unnamed financial stragedies. It can get very complicated; even financial professionals become baffled and confused. These types of investments violate the Prudent Man Rule.

Get me here; I am not in favor of putting our Permanent Fund money in green backs in a vault. The money in the Permanent Fund has in the past been prudently and wisely invested. And sure, it was diminished when the market declined 2000-2001. But that is not a good reason to take on more risk by investing in Hedge Funds

There has been a move in the last five or so years to take on increased risk to diversify and produce more for the people of Alaska. Producing more is a worthy goal. It seems to me that way back, the fund initially was invested in US Treasuries, (low risk) then there was a move to add equities (stock). Then there was a move to provide for alternative investments, (real estate, partnerships, and other more specialized securities) for diversification. Diversification reduces risk. The more eggs in more baskets means they don't all get broken. This has been a sound basis for the Fund's investments. I believe the Prudent Man Rule has been followed.

The recent change to add Hedge Funds to the Alternative Investments category and increase the amounts allocated to Alternative Investments spells trouble. The fund is increasing the risk level of the Permanent Fund investments.

Hedge Funds involve private transactions. These transactions are unregulated and by their very nature are secret and unmonitored. I say it is not ok to invest public money in private equity unregulated funds that keep records and financial dealings private and out of the scrutiny of owners and regulators. This is a sure recipe for trouble. The risk is high that financial transactions, transacted in secret, could lead to improper dealing. Issues of suitability are of major concern regarding the use and investment of Public money.

With every transaction in the securities market, there are always two sides to a trade. "One wants to sell and one is willing to buy". If a Hedge Fund is heavily leveraged and the markets decline, the margin (leverage) calls have to be covered rapidly and high loses occur before the trade can be closed. When a Hedge Fund has to close down or decides to sell out, institutional investors, like the Permanent Fund, usually take a back seat to high value individuals with large holdings, which means that the large institutional investors could lose the most money.

Another problem is that Hedge Funds are unregulated and not required to report. This lack of accountability spells trouble. Public money should not be placed in an investment where there is no mandated accountability.

How do you know what you have when you invest in a Hedge Fund? How do you know at any moment, what the market value is?

You don't, because it is a Hedge Fund.

To prove this, try to look up the value of a Hedge Fund in the newspaper or on the internet. Like a black hole, it is simply not there.

To the Trustees of the Permanent Fund:

1. Do not put our investment in any vehicle that does not have public scrutiny.

2. Do not invest public money in unsuitable investments such as Hedge Funds.

This is the people's money

James R. Dahl
Ketchikan, AK - USA

Mr. Dahl is Registered as an Investment Advisor Representative with Otter Creek Partners, Registered Investment Advisors, Ketchikan Alaska. He has been involved in the investment securities business since 1983.

 

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