Circling Back to the Caisse and SARA Fund

A senior pension fund manager at the Caisse asked me to meet him late yesterday afternoon to discuss last Friday's comment on Quebec's absolute return flop. He didn't want to discuss the content as he's not in charge of hedge funds but told me he was "extremely disappointed with the form of the message, the innuendos of fraud and mismanagement" and compared the comment to "Quebec tabloid sensationalism."

Moreover, he told me that "in this business, you're only as good as your last trade," and warned me that "if you keep irritating large Canadian pension funds, you'll find it difficult to secure employment or get their support for your projects." He also asked me point blank: "If you were still consulting for the Caisse would you have written this comment? Would you have written a similar comment about Teachers', CPPIB or PSPIB?"

As far as governance is concerned, he reminded me that "the Caisse isn't managing the public's money and is only accountable to its depositors." He added: "We don't need to justify who we enter into a business arrangement with. Not to you, not to anyone except to our depositors. If you don't understand why the Caisse, Fondaction CSN and Fonds de solidarité FTQ mandated HR Strategies for this ($175 million) SARA Fund, then you should have contacted someone to get the appropriate information before trashing the Caisse and the project."

At this point, I got irritated and fired back that I did contact people at the highest level at the Caisse but nobody bothered contacting me back. I also told him that I didn't appreciate being brought into the Caisse to be scolded at like a little schoolchild and reminded him that I wrote several positive comments on the Caisse, Michael Sabia, and still believe the Caisse is much better now after surviving the $40 billion train wreck in 2008. I also reminded him that when I consulted for the Caisse earlier this year, I delivered on what was asked of me.

I told him flat out that "I'm not waiting for any Canadian pension fund to hit my bid but there is no doubt in my mind that someone with my experience in public and private markets is an asset. I could be an instigator, hard to manage, but if you put me in the right job with the right people who aren't going to backstab me (ie. adhere to Ray Dalio's principle #11), I can add significant value to any pension fund. No doubt about that whatsoever in my mind which is why I continue to blog here and on Zero Hedge and now have over 2,000 people a day reading me including top financial institutions around the world." I also told him that I'm proud of my blog and that other senior pension fund managers are supporting me, sharing valuable insights, as are other professionals on the buy and sell side.

But I also told him that I will take his advice and be "less personal and more constructive" on my blog and "give institutions the benefit of the doubt and stop assuming gross incompetence, negligence or fraud." I told him that the ugly truth was that I was angry when I wrote last Friday's comment, probably shouldn't have hit that "publish post" button, but some of the concerns I raised are still valid. So, let me set the record straight once and for all on Quebec's absolute return fund sponsored by the Caisse, Fondaction CSN and Fonds de solidarité FTQ and managed by HR Strategies:

• While it's true that the Caisse doesn't need to justify its business arrangements to me or the media, the truth is that following the 2008 crisis, it's under the microscope and public scrutiny is justifiably high. If the Caisse, Teachers', OMERS or any public pension fund suffers a serious deficit, taxpayers are potentially on the hook. It's not as easy as cutting benefits and raising premiums, if things go very wrong, the government is legally obligated to comply with the terms of the collective agreement with public service employees. That's why I'm a stickler for governance and transparency.
• As far as this $175 million SARA Fund is concerned, I believe that it's good for Quebec's hedge fund industry and fully support that the Caisse, Fondaction CSN and Fonds de solidarité FTQ give more money to Quebec's established hedge funds.
  
• But I also have valid concerns and still feel that the biggest beneficiary of this project is René Perreault and his boys over at HR Strategies. Good for them, if I was in their shoes I'd do the exact same thing, but the optics don't look good, not to mention that some people feel that HR Strategies didn't treat all the managers fairly in their due diligence process.
• I had previously mentioned that Mario Therrien's group at the Caisse should have directly invested in these funds and seeded others. After some thought, I realize that this would have placed him and his team in an untenable position because Montreal's finance community is small, so it's easier for the Caisse to mandate HR or someone else to do this. Also, as far as seeding, the Caisse cannot take a majority stake of any fund and therefore by definition seeding is not an option.
• Having said this, this was a partnership between the Caisse, Fondaction CSN and Fonds de solidarité FTQ and therefore they could have seeded a few funds. The real problem with this venture was communication. Go back to read this part:

"The Caisse's participation in the SARA Fund will both provide the institution with attractive returns relative to the level of risk and boost the development of Québec's financial expertise. HR Strategies, a partner the Caisse knows well, has an interesting road map and is renowned for managing absolute return funds of funds — in addition to offering very reasonable management fees," said Mario Therrien, Senior Vice-President of Hedge Funds at the Caisse de dépôt et placement du Québec.

"This fund will have a developmental effect on Québec's financial industry. It will stimulate activity in the sector. Many features, including its transparency and manager compensation structure, are based on the best practices of socially responsible finance, helping position Montréal, Québec's largest city, on this forward-thinking idea," said Geneviève Morin, Chief Financial and Corporate Development Office at Fondaction CSN.

"In addition to relying on the talent we have in Québec's financial sector, the SARA Fund promotes the emergence of new portfolio managers and, at the same time, supports Québec entrepreneurship in this promising sector. In line with our mission, this initiative also meets the objectives of the major Montréal Finance project," said Gaétan Morin, Executive Vice-President of Investments at the Fonds de solidarité FTQ.

• On the specific point of promoting the emergence of new portfolio managers, the SARA Fund is a complete failure. There is no doubt about that in my mind and I should know because I've met most of the established and emerging fund managers in Montreal (meeting yet another excellent fund this morning that received no money from HR Strategies).
• The real tragedy in all this is that seeding hedge funds doesn't have to be a "risky venture" and if done properly, it can pay off huge for pension funds, their beneficiaries, and create employment in Quebec's financial industry which we desperately need. Importantly, when you seed new funds, the multiplier effect of new employment is disproportionately much bigger than when you give money to established funds. And all of three Quebec institutions that funded this venture know this.
• I recommend that the three limited partners sit down and discuss the creation of a new fund which specifically targets seeding new Quebec hedge funds. I'd be more than happy to sit with them to discuss this seeding project but they already know what needs to be done and how to go about doing it properly. If we're going to say we're "proud Quebecers" then let's start acting that way and promoting our own home grown talent.

On that note, I said what I had to say on Quebec's absolute return fund. I will continue to blog, trade stocks and meet managers because that's what I enjoy doing. I will take the advice of this senior pension fund manager and others and remain professional and less personal, giving institutions the benefit of the doubt, but I also expect the same in return. I know I can be a real "pension prick" at times, but the goal of my blog is to stimulate interesting discussion and promote best governance standards so that beneficiaries and the public are at ease that public pension funds are managed in everyone's best interest. That's the single most important reason why I continue to blog even though it has limited my professional career.

***Feedback***

One of my readers was kind enough to share these thoughts:

First, I think that you have nothing to apologize for. The reason that everyone reads you is because (a) You write well; (b) You say things that many wish to say but cannot (mainly for economic reasons); and (c) you provide a very helpful exchange of ideas and information flow.

Second, the points you raise about seeding emerging managers is a very valid one. As we all know, there are numerous studies out there that show that the value-added from investing in many funds is when they are small/startup/emerging. That sub $500 million bracket is where the value is. (Disclaimer: we have a FoHF that invests in sub $500 mil HFs).

Third, if you did not write provocative pieces, you would likely be ignored by the Caisse and others. I will share with you a few others that like you are lone voices in the wilderness. Perhaps you should form a guild??!

Keep up the great work.

Another reader shared these thoughts:

twitter/blogs allows for few to inform many, w/o mediation of editors/publishers beholden to advertisers (which are more than likely the hegemons and plutarchs)

media more and more abt the readers/electorate/mainstreet, less and less abt the larger political/corp/govt orgs

I thank these readers and others who appreciate my contributions.