Institutional Investor's Alpha Magazine - February 2009 - (Page 14)

Pension Corner Strategies Digging Out In Kentucky a desperate gap in the state retirement funds demands a solution that may include hedge funds. BY KATIE GILBERT dam Tosh sees the $12 billion Kentucky Retirement Systems confronted with a cold and seemingly insurmountable challenge: How to improve its staggering 70 percent funding shortfall to keep pace with $1.5 billion in annual pension and insurance commitments. Tosh is fairly certain that one answer will include a maiden venture into hedge funds. “We’re trying to be more globally diversiﬁed and more opportunistic,” he says. “If we can ﬁnd hedge fund strategies to help us be more op- A Adam Tosh is trying to get $12 billion Kentucky Retirement Systems out of a deep hole. portunistic and help with the abysmal funding ratio that this system has, we’ll try to take advantage of that.” Tosh, 37, is chief investment ofﬁcer of the underfunded KRS, which oversees the investments and beneﬁts for the Kentucky Employees Retirement System, the County Employees Retirement System and the State Police Retirement System. KRS’s portfolio was down 22.09 percent for the ﬁrst 11 months of 2008 (the Standard & Poor’s 500 index, by comparison, fell by almost 40 percent). As recently as 2000, KRS was roughly 130 percent funded. But because of a cutback in state contributions, increases in beneﬁts and the stock market crash of 2008, the tide has turned, and Tosh is looking for an investment mix that can begin to close the funding gap. He says a ramped-up alternatives allocation could play a crucial role, but he’s mindful of the system’s cash-ﬂow needs. “It’s a dilemma that I have across the entire fund,” he notes. “I’m trying to do it in a way that makes sense.” For the time being, he is avoiding being speciﬁc about what the ideal recovery breakdown looks like. “We’re not going to want to pigeonhole ourselves by saying, ‘We’re supposed to have X percent within private equity, or X percent within the hedge fund space,’” explains Tosh. He envisions making an initial allocation of 1 or 2 percent to hedge funds and slowly building from there. But even that is conjecture, he says: “The market conditions will determine how we’re able to structure the program.” Being opportunistic, Tosh explains, means less longterm planning and more emphasis on being poised to take advantage of investments. He predicts that in the second quarter, KRS for the ﬁrst time will put money with hedge fund managers, though he is reluctant to say how much. Before joining KRS in February 2007, Tosh was a senior ﬁxed-income strategist at Pittsburgh-based money management ﬁrm MDL Capital Management, which he left, he says, because of problems at the ﬁrm. MDL was sued in 2005 by the Ohio attorney general for losing $215 million of the Ohio Bureau of Workers’ Compensation’s money in a Bermuda-based hedge fund. Tosh says he had no involvement in the hedge fund and had been at MDL for only three weeks when the controversy came to light. Before his tenure with MDL, Tosh had an eight-year stint as director of ﬁxed-income investments at the Pennsylvania State Employees’ Retirement System (which had $25 billion in assets at year’s end). He worked extensively with then-CIO Peter Gilbert to structure the system’s portable alpha and hedge fund strategies, which he says he may try to replicate in Kentucky, though the PennSERS portable alpha program took a huge hit in 2008 (see “An Alpha Bet Gone Bad,” December 2008/January 2009). KRS ﬁrst stepped into alternatives in 2004 and allocated just 7 percent to the area before Tosh’s arrival (4 percent in real estate investment trusts, 2 percent in private equity and 1 percent in venture capital). The rest was divided among Photograph by Brad Feinknopf 14 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2009

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2009

Institutional Investor's Alpha Magazine - February 2009 Contents Letter From the Editor Longs & Shorts Digging Out A Call to Mentor Dicey Detroit The Constant Skeptic Cover Story: The Undaunted What Were They Thinking? Dark Days in Greenwich True Stories from the Commodities Files Return of the Native The Quest for Cover Moving On from Madoff

Institutional Investor's Alpha Magazine - February 2009

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