Hedging Strategies Gone Bad – JPMorgan To KRS

Two weeks ago, former Kentucky Retirement Systems trustee (2008-2012) and SEC whistleblower Chris Tobe sent an editorial to the Herald-Leader. It was ignored.

So let’s take a look, as it’s timely and relevant:

Recent headlines on a hedging strategy gone bad at JP Morgan have shaken the country as taxpayers realize that we may be on the hook for this $3 billion debacle as JP Morgan is too big to fail. However, close to home no one seems to care that the Kentucky Retirement Systems (KRS) lost over $100 million in a currency hedging strategy for fiscal year 2011.

This secret currency manager (Record) was never mentioned at any of the investment committee meetings I attended until I discovered their existence in August 2011. Record as a manager was not in Investment reports from August 2009 to Aug 2011. It was even hidden from our auditors as the FY 2010 financials state that “KRS has no formal policy to limit currency risk”. And worst of all this secret manager was paid $7 million in fees over a couple of years to lose over $100 million. All this while the state portion of KRS- KERS is nearing insolvency. When I brought this up at the August 2011 board meeting it was dismissed. We spent less than 30 seconds on hundreds of millions in underperformance but spent nearly 30 minutes discussing getting I-Pads for the board.

Hope you paid close attention to that last line about spending more time on whether to buy iPads for the board than was spent on hundreds of millions of dollars of taxpayer funds being lost.

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