Your State Pension Is Unknowingly Shorting Stocks Like GameStop All The Time
The nation has been captivated by revelations of millions of amateur traders collectively through social media and online trading platforms taking on Wall Street’s highest cost, highest risk, most secretive money managers and winning—at least in the short term. These individual investors have piled into a David-versus-Goliath trade around the stock of GameStop GME , a troubled video game retailer. Hedge funds and other professional money managers were shorting GameStop’s shares, betting that its stock would fall in value while retail investors were banding together to buy shares and options betting the stock would go up.
The consensus seems to be that retail investors should not be banding together and gambling their hard-earned savings in this way and the SEC has said it is “actively monitoring the ongoing market volatility.”
If you’re a taxpayer or a government worker depending upon a state pension fund for your retirement security, you may be alarmed to learn that nearly all state pensions engage in high-risk strategies, including shorting stocks like Gamestop all the time. Paying lavish fees to hedge fund and other alternative investment managers to recklessly gamble workers’ retirement savings is bad enough. Worse still, the officials that oversee state pensions have no idea which stocks are being shorted by which external managers at any given time (perhaps even acting in concert) or the total amount of pension assets at risk.
That’s because state pensions routinely agree to be kept in the dark about alternative investment portfolio holdings and strategies. For reasons that have always been incomprehensible at least to me, state pensions demand transparency regarding their most liquid (publicly-traded) investments but readily consent to a complete lack of transparency regarding their riskiest, blithely accepting assurances by Wall Street that secrecy is required to achieve market-beating returns. This complicity between state pensions and Wall Street eviscerates state access to public records laws since the pensions conveniently have no information regarding their riskiest investments to disclose in response to pesky public records requests.
With state pensions already severely underfunded, allocating 26 percent to as much as 50 percent of their assets to alternative investment strategies including long-short equity poses enormous risk. Bear in mind, the ability to engage in short selling is not limited to hedge funds. Most other alternative investment managers are largely unconstrained in their investment strategies—they can invest in almost anything at any time. As a result, on any given day a private equity fund may be 100 percent invested in gold, the next 100 percent in silver, the next, 100 percent shorting GameStop.
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For over a decade I have implored the SEC to examine alternative investment secrecy demands and questionable investment practices in connection with public pensions. Unlike the GameStop speculators today who at least know what they’re buying and selling, massive public pensions—supposedly sophisticated institutional investors handling trillions in retirement savings—have agreed to be kept clueless in the dark.