Promotors and thieves go where the money is.

Ever hear of a scheme called, “portable alpha?” Most people haven’t and wouldn’t understand it unless they have had contact with the far side of the securities business. But many of us are affected by this complicated investment strategy which has invaded the pension funds of many states for billions of dollars of losses, most of which will probably never be recovered.

Who will make good on the losses? Well, depending on state law, most of it will be made up by the taxpayers of the states involved. Another crushing blow to the American taxpayer who is living in a bankrupt economy.

Portable Alpha is the name of an extremely aggressive strategy using sophisticated investments including various derivatives peddled to pension funds and other institutional investors when the stock market was rising to unheard of heights. Wall Street Journal reports an estimated 74 billion has been invested using portable alpha. Pension funds seem to be the hardest hit including Pennsylvania, South Carolina, San Diego County, Kansas, and Massachusetts. Unless a miracle occurs, investors in alpha funds will find they have bought into a highly leveraged bet on the market and in hedge funds. They will lose a LOT of money!

The idea was to use portable alpha is to match the market with a small dollar amount by using derivatives such as futures, and use other funds remaining for direct investments. Trouble is, (in my opinion) many managers of these funds didn’t understand what they were committed to. Portable alpha was a good idea when started in the late 80s, but no one seemed to know what would happen in a market that fell as fast as the current one. Even the pros that used portable alpha have been burned lately.

Years ago, when I managed investment accounts for two banks, I asked our governor why the state employees pension fund’s board of directors did not include any conservative bankers or investment people, and his answer was, “They tend not to take chances!’ The board was dominated by promoters, and other “Investment” people, who sold the state troubled real estate assets and even a failing business deal or two. I sure didn’t want the responsibility, but still, I wish he had listened. Wonder who oversaw the state’s investments in portable alpha.

Sorry this hasn’t been a spellbinder, but it is just the kind of mistakes that are exposed in tough times that can affect us all-a lot!

Later.