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The team, consisting of a computational social scientist, several database researchers, a financial expert, and Wedel, meets every month or so to sift through databases based on government filings that detail financial transfers between big public pension funds and hedge funds. (The information was given to them by the Foundation for Fund Governance.) “It’s not clear how the transfer of money from pensions is happening and what the risks are,” Wedel explains. “My purpose in looking at hedge funds is that I want to see how this world works and how information flows by trying to connect the dots.”
Maciej Latek, a tall, Polish-born computational social scientist whose day job is creating risk models for contentious environments like international borders, stands at one end of the table in a pressed oxford shirt and tapered blue jeans. He projects a diagram, or what anthropologists call a network map, of dots and lines onto the wall. The map depicts all transfers exceeding $50 million that occurred between 2009 and 2012 from pension funds to hedge funds, showing the origins, destinations, and size of the transactions. It reveals a dense web, with many thin lines representing relatively small transfers and a few thick, ropy lines representing billions of dollars. The graph reveals a story of precariousness: The proportion of U.S. public pension funds — money saved and invested by millions of public employees — in hedge funds has grown from one percent to 12 percent over the last 11 years, and a few pension funds have invested as much as 29 percent. All the while, the hedge fund industry has been moving money freely to offshore accounts that operate by different rules than those that apply to U.S. funds.
Latek projects another graph onto the wall, this one showing the governance of offshore hedge funds. Hedge funds registered in the Cayman Islands are required to have two directors who sign off on all trades, to be sure the fund is working in the interests of investors, not managers. On Latek’s graph is a series of lines connecting pension funds to hedge fund directors — but there are many more funds than directors. One man is a director of no less than 362 different hedge funds. The data seems to say that some hedge funds have little oversight — that your high-school civics teacher’s nest egg is in an unguarded henhouse. With a pained half-smile, Latek calls the graphs “a portrait of riskiness.”
Is the entire system of fund directors a contrivance, a joke that the industry is in on but the public is unaware of? Latek spits out a question: “What’s the value of a governance structure that’s not providing governance?”
