Chaos Kings by Scott Patterson

Author:Scott Patterson
Language: eng
Format: epub
Publisher: Scribner
Published: 2023-06-06T00:00:00+00:00

Good morning,

Elisabeth Bourqui has submitted her resignation as CalPERS Chief Operating Investment Officer (COIO) effective today.

That was it.

The author of the email was Ben Meng, who’d worked at the pension fund back in the 2000s and had rejoined just that month. Spitznagel and Yarckin had never heard of him.

Meng, unbeknownst to Universa, had made a power grab inside CalPERS. He would be the new Eliopoulos, with control of the fund’s entire portfolio. “Ben was pulling the strings behind the scenes,” a person familiar with CalPERS said. “He was moving pieces on the chess board to put himself in power.”

In short order, Meng began reviewing every position and strategy at the fund—a colossal task for an operation that by then included some $400 billion in assets as the stock market continued to rally. It was, indeed, a sensible move. CalPERS had been performing poorly for years and a review was badly needed. It was still recovering from the Global Financial Crisis when it lost nearly a quarter of its assets in its 2008–2009 fiscal year, putting pressure on the cities, schools, and state agencies that relied on the fund. Meng brought in outside analysts to help review the strategies.

Among the programs they flagged: the Universa tail-hedge program.

They concluded Universa was too expensive. It was a cash drag, a line item that would pull down performance. It also was an ant on the giant beast that was CalPERS’s megaportfolio. It could never cost-efficiently scale up to a size that would move the needle, or so they said.

Other CalPERS advisers disagreed. Andrew Junkin, an executive of Wilshire Associates, told a meeting of the pension fund’s board in August 2019 that the strategy was well worth the cost.

“There [are] some really weird numbers on this page that I thought it was worth highlighting,” he told the board, referring to a sweeping report on the fund’s strategies and performance. He referred the board to a line item titled Risk Mitigation Strategies. The firm had $200 million in those strategies, and they were down an eyebrow-raising 82 percent.

“That seems awful,” Junkin said. “Remember what those are there for. They are sort of tail-risk hedging strategies. In normal markets, or in markets that are slightly up, or slightly down, or even massively up, those strategies aren’t going to do well. But there could be a day when the market is down pretty significantly, and we come in and we report that the risk mitigation strategies are up 1,000 percent. It’s possible the day that happens, you’re going to ask yourself why you didn’t have more of this stuff,” he said. “It’s sort of an insurance premium. You pay a little bit when the market is normal, and then when the market sells off, it should help support the fund.”

Meng disagreed and decided to kill the strategy in a sweeping purge of outside fund managers. Universa didn’t hear about the decision for months. Then, in November, Yarckin got a call from a person at CalPERS he’d never spoken with.

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