Pension Funds, Risk & Self-Regulation

Last weekend's edition of the Wall Street Journal featured an article in the Money & Investing section entitled Who Needs Risk Rules? Pensions Act On Their Own.

According to the article, several pension funds have begun changing their investment managers well ahead of any definitive FINREG dictates.

One public pension fund in Oklahoma dismissed Bill Gross' PIMCO as a manager because of "the risks of its use of derivatives whose values couldn't be cross-checked in audits."

That's got to sting. Is it really the case that some derivatives are so special that nobody offers the equivalent of the old bond value matrices for illiquid instruments? Apparently so.

Some states are prohibiting public pensions from engaging in derivatives investments, while some other public funds have sworn off swaps because of "counterparty risk."

Now, you're talking. My favorite misunderstood risk of all is counterparty. Accepting a promise to perform by a party that can't is far more risky than mere exposure to the vagaries of market valuations.

The Oklahoma fund was detailed as not even being able to discern, from PIMCO's statements, which side of some swaps they were on.

Looks like some investors are actually learning from the last few years and limiting their exposure to instruments which they either don't understand, on which they can't easily verify valuation, or where counterparties are less than acceptable in terms of risk.

I guess freely-operating markets and agents in them, given time and experience, work after all. On their own.