Institutional Investor's Alpha Magazine - April 2008 - (Page 72)

Denise Nappier CRPTF joined activists opposing the reappointment of Michael Boskin, who led the Council of Economic Advisers under president George H.W. Bush, to the board of Exxon Mobil Corp., citing what critics said were Boskin’s and the oil giant’s insensitivity to the environment. Add this strange fact to the mix: Though Connecticut has the largest concentration of hedge funds outside New York and London, its pension funds don’t invest in them, largely because of a conservative streak born of a CRPTF scandal that occurred just before Nappier took ofﬁce. Nappier, a former Hartford city treasurer and an urban planner by training (she has a master’s degree in community planning), overcame long odds to win the state post in 1998. She had difﬁculty even getting on the ballot for the Democratic primary, and the Republican incumbent, Paul Silvester — a well-connected appointee of then governor John Rowland (himself later forced out of ofﬁce by scandal) — was popular among the party faithful. Nappier beat Silvester in a squeaker. But in the weeks before Nappier’s swearing-in, Silvester admitted diverting millions of dollars of retirement fund money to ﬁve private equity ﬁrms in exchange for kickbacks. By the time Nappier took ofﬁce, Silvester had pleaded guilty to racketeering, bribery and money laundering. He was sentenced to 51 months in federal prison. Now in her third term and up for reelection in 2010, Nappier seems to have long since steadied the ship, putting new procedures and oversight practices into place — including publicly disclosing all investment transactions — and enforcing existing ones. In recognition of the fact that much of Silvester’s misconduct took place after he lost his bid for reelection, a Connecticut law promoted by Nappier now bars lame-duck treasurers from putting money in private equity or real estate without the approval of the state’s Investment Advisory Council. Nappier has brought the council out of the shadows; it had been largely sidelined during Silvester’s tenure. Nappier met recently with Alpha Contributing Writer Udayan Gupta in her ofﬁce in Hartford to discuss why Connecticut has been slow to invest in hedge funds, her penchant for socially responsible investing and her anger toward predatory lenders. Alpha: You recognize the irony, don’t you, in never having invested in a hedge fund although Connecticut has the third-biggest hedge fund concentration in the world? Nappier: As much as I would like to adopt a parochial view What’s keeping you from making the move? Investment history has taught us that when new investment vehicles and alternative-investment ideas come to fruition in the marketplace, that presents a rare opportunity to generate alpha. But until just recently, our investment policy did not allow the CRPTF to invest in alternative vehicles. Last fall we adopted a revised investment policy statement and, among other things, included an allocation to alternative investments. However, in order to get into this business, we need to proceed judiciously and with caution. Okay, so how are you coming along? During our last asset allocation liability study, we took all classes into consideration, including alternativeinvestment vehicles, which may include hedge funds. Based on the ﬁ ndings, we understand that carefully selected hedge funds can help reduce the CRPTF’s overall portfolio volatility while generating annual returns that meet our assumption of 8.5 percent. We’re positioning our portfolio to enable us to actively consider investment opportunities in this space. What advice have you sought on which hedge funds to put money into? We’re hiring an investment consultant [for this particular job], New England Pension Consultants, who will help us ﬁ nalize our strategy and guidelines and determine how best to enter this space. It may include hedge funds and other types of total-return strategies. This new asset class may by law account for up to 8 percent of the portfolio but does not include real estate or private equity investments, which are already separate asset classes within the CRPTF. Why haven’t you pushed a bit more? What has kept hedge funds off your radar for so long? When hedge funds were the darlings of the market, we were heavily involved in trying to get our private equity house fund in order, following the scandalous administration of my predecessor. Can you remind us of what happened? — we certainly have our share of prudent initiatives focused on keeping some of our investment dollars in our own backyard — my ﬁrst priority is to seek out permissible investment strategies that complement our overall portfolio. We’re neither against investing in hedge funds nor are we necessarily advocates for hedge funds. As the principal ﬁduciary of the CRPTF, I have the obligation to remain open-minded to new ideas, and that is precisely where I stand today — open to the possibility of investing in hedge funds. 72 • INSTITUTIONAL INVESTOR’S ALPHA • APRIL 2008 Imprudent commitments were made in illiquid investments on the basis of undue inﬂuence, bribes and kickbacks. So we actually missed the late ’90s, early 2000 window, and today long-term capital market assumptions depict future average returns that will not be as robust. We’re in no rush to play catch-up. Social responsibility has been one of your mantras. Is it possible to make socially responsible investments in the slew of distressed assets out there? It’s possible, and I’ll give you an example: The genesis of the credit market dislocations points squarely to the subprime issues. It is despicable that poor people were lured into loans that lenders had to know were highly

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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