Hedge fund manager lost money for Philly, made it up with 'counsel': report

Philadelphia's defining adjective is "cynical," writes Bloomberg's Michael P. Regan, in this story about a poorly-performing, "fraud"-exploiting investment by the city's woefully underfunded Board of City Pensions in short-seller James Chanos' Kynikos hedge fund. Highlights:

"Philadelphia's pension board hired Chanos's firm in 2011 and put some money into the Kynikos Opportunity Fund. Yet the fund's returns were 'challenged,' leading to a performance review questioning the wisdom of the investment, according to minutes of a committee meeting last year that went largely unnoticed...

"The pension's ($25 million) investment in the Kynikos Opportunity Fund was down almost 1 percent in the 12 months through December," though that's less than some other shorts that lost bigger against last year's stock market rally, Regan added.

"The hedge-fund consulting firm Cliffwater gave the pension board an outline of the reasons to blame for the Kynikos performance: 'The primary detractor of performance for Kynikos has been the current macro-economic environment,'" according to the minutes. "'Accommodative policies of the Fed have resulted in unprecedented low interest rates..." When you short, the minutes conclude, "it can be very painful when the markets go the other way."

"Here is when things get juicy," the Bloomberg story adds. "The board discussed a handful of short positions Kynikos had that 'went the other way,' big time. The stocks rose more than 300 percent in 2013," blowing down Kynikos' short bets that they would decline.

"Now, implying that Jim Chanos is a bad short seller is a loud bell to ring... it's like accusing the local pizza jawn of making a lousy cheese-steak stromboli...

"Still, the pension's chief investment officer at the time, Sumit Handa, and (pension adviser) Cliffwater chief investment officer Stephen Nesbitt agreed that the three Chanos shorts were potentially accounting frauds that would likely pay off for the short-seller eventually..."

But managing a so-far flailing short fund wasn't all Chanos did for Philadelphia. He also "counseled [Philadelphia pension board] staff for the last two and a half years and has provided an unprecedented amount of research," the minutes add. "When you look at the plan's strategic allocations on the flash report, it is a result of this research and counsel. This has resulted in the plan being overweight U.S. equities which was a very good decision for the portfolio in 2013. The reason why the plan has been underweight strategies that underperformed, such as international and emerging equities, is a direct result of the research and counsel staff has received from Kynikos."

In sum, Bloomberg says, Philadelphia's investments staff was "willing to give Chanos some time to prove those shorts were the right call. There is one plot twist, however. His big supporter Sumit Handa resigned from the pension fund last month to take a job as CIO of "a major financial institution," as we reported via Chief Investment Officer and confirmed with city officials last month.