Fort Worth Star-Telegram – Everything seemed to be going great for an innovative investment made by the city’s retirement fund in early 2004. In fact, after just four months, the pension fund wastold that it had earned more than $230,000 on its $6 million investment.
By 2005, though, that investment – Bayou Management hedge funds of Stamford, Conn. – had collapsed in a $450 million fraud.
To the city’s relief, the Fort Worth pension fund had pulled out in time to avoid any losses.
But its near brush with disaster points to weaknesses in fundamental safeguards that could undermine the city employees’ retirement fund, a Star-Telegram examination found. Fixing those problems is particularly important because the pension decided, under the guidance of former Executive Director James Newgard, to increase its stake in other high-risk investments, including hedge funds and private equity.
It may eventually invest about 18 percent of its portfolio – almost $290 million – in those alternatives. That’s one of the most aggressive stakes among public pension funds in Texas, some of which have shunned alternative investments not just because of their risks, but also because of their high fees.
Fort Worth’s costs have soared as it has moved into hedge funds, which so far have had lackluster returns. Hedge funds use aggressive trading strategies and are largely unregulated.
Newgard, who left in February for another job, said he saw no cause for concern as the pension proceeds with its plan. He also credited the pension’s consultant, Consulting Services Group, for spotting signs of trouble at Bayou and pulling out before the collapse. “We did not lose any money,†he said.
Joe Meals, a spokesman for the consultant, said his company was misled into joining Bayou, as were other savvy investors. Bayou perpetrated a fraud on the industry, Meals said.
