PhillyDeals: No telling how crisis thumped SERS fund

Official secrecy makes it hard for taxpayers to know what's happening to billions of dollars invested by

Pennsylvania's State Employees' Retirement System

, as investment values fall.

SERS's board, with Philadelphia lawyer, lobbyist and ex-State Rep.

Nicholas V. Maiale

as its chairman, had reported handsome returns from its investments in recent years.

It has needed to show big profit to keep pace with the higher pensions for new state retirees mandated by former

Gov. Ridge

and the

General Assembly

in 2001.

In its attempt to boost returns, SERS has developed an unusual investment profile, for which it paid $331 million in fees last year alone to more than 100 private investment firms.

As of its last quarterly report, June 30, less than half of SERS's $33.6 billion was in traditional stocks and bonds, whose values can be measured daily on the public markets.

A majority of SERS's assets were invested in hedge funds, private equity, real estate and other private assets.

The system's then-chief investment officer,

Peter Gilbert

, patiently explained the idea to me two years ago, after the magazine Institutional Investor gave him its annual Award for Excellence in Investment Management.

Gilbert said he and his colleagues wanted SERS to look less like an old-fashioned stock-and-bond fund and more like an Ivy League endowment, with investments in a range of nonpublic asset classes that both promised high returns and weren't tied to stock market cycles.

As a result, while SERS was only the 38th-largest U.S. pension fund, according to the latest list by Pensions & Investments magazine, SERS ranked as the No. 1 pension-fund investor in hedge funds, commodities, and "portable alpha" investments, which tie hedge investments to stock-index options.

SERS has more invested in hedge funds than the much bigger California, New York, General Motors Corp. and AT&T Inc. pension plans. It has more invested in hedge funds than the larger New Jersey and Pennsylvania teachers' plans - which, however, have followed SERS's lead in increasing their private investments in recent years.

SERS was also a large investor in venture capital and other private equity, and a significant investor in real estate.

As of June 30 - the date of the last "official" data made public, according to spokesman

Robert Gentzel

- SERS held $9.1 billion in hundreds of hedge funds.

SERS won't name those hedge funds. It is not required to do so. Under a state law signed by

Gov. Rendell

, the nondisclosure is meant to make fund managers more comfortable running Pennsylvania's money. SERS only has to name the big management firms, including Morgan Stanley, that buy and sell hedge funds for the state.

As of March 31 - again, that is the most recent "official" data, Gentzel said - SERS also held $5.1 billion in private equity, $3.1 billion in real estate, and $2.6 billion in commodities and related investments.

What are they worth today?

"Hedge funds are down since June 30," Gentzel told me. SERS expects private equity and real estate to also be reporting "reduced market values."

"As you know," Gentzel said, "there are very few assets that have not declined in value in this market."

How far down? It's not just an academic question. When SERS investments falter over time, pensions still get paid, but taxpayers have to make up the difference.

The SERS board met with its consultants and some of its hedge fund managers Wednesday night, Gentzel said, but "they did not make presentations on recent fund performance."

Instead, the consultants - like mutual fund salesmen confronting nervous small investors - talked about investment cycles, and how, when prices fall, there are new buying opportunities.

When SERS puts out its third-quarter report later this fall, private-equity and real estate results will be reported only through June 30, and won't include the summer meltdown. Today's losses won't be publicly logged for months.

Maiale's board hopes its consultants are right, that doomsayers like

BlackRock Inc. chief executive officer Laurence Fink

(he predicts a hedge fund and private-equity wipeout) are wrong, and that the hedge fund managers handling SERS's billions will recover.

Whoever they are.