Pension funds are feeling the pinch in today’s low interest rate environment. That said, any kind of notable loss of capital is not likely to be overlooked by pension investment committees. A case in point is the $25 million investment that the city of Philadelphia’s pensions had made in Jim Chanos’ Kynikos Opportunity Fund that was pulled this week due to the fund losing 4.7% in April.
More on Philadelphia pensions redeeming investment in short-biased Kynikos fund
The Philadelphia Board of pensions and Retirement investment committee voted unanimously to remove the pension’s $25 million investment in the Kynikos Opportunity Fund after the fund lost close to 5% in April, according to the minutes of a recent board meeting – the news was first reported by Simone Foxman of Bloomberg. Bloomberg sources say Kynikos lost money shorting Chinese equities and firms it thought had accounting or financial problems.
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Chanos, known for anticipating the collapse of Enron, could not be reached for comment.
Of note, Rob Dubow, the $4.5 billion pension fund’s finance director, is on the record as having questioned investing in short-biased funds as the bull market in stocks has been hammering this type of fund. The Philadelphia pension fund lost 6.4% annually on its investment in the Kynikos fund from May 2012 through February 2015. It should be noted that although the hedge fund underperformed the market, it did better compared to short biased funds.
In a performance review early last year, Philadelphia decided to stay with Chanos because he had assisted the fund with broader allocations, including limiting investments in international and emerging equities. The then-CIO, Sumit Handa, argued that the Kynikos short bets were against firms that potentially committed accounting fraud and would likely pay off. Handa departed the Philly fund in January of this year to take a position at the Bank of New York Mellon.
Third time means a strike out
The investment committee meeting minutes indicate committee members asked new CIO Brad Woolworth “what went wrong?” and if this was a one-time occurrence that Kynikos can overcome.
Woolworth answered that if this had been the first time, he would probably have given Chanos another chance. However, this is the third failure by Kynikos. The fund has already had the conversation, he said, and the staff had thoroughly discussed this manager before recommending they withdraw their investment.