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How PSERS pension plan fell out of love with Bridgewater, the world’s biggest hedge fund

Reported by Inquirer
Mar 28, 2022· 3 min read
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Key Takeaways
  • • PSERS, Pennsylvania's $70–72 billion teacher pension fund, reduced its Bridgewater Associates allocation by $2 billion in August 2020 after nearly a decade of underperformance relative to benchmark funds.
  • • PSERS paid Bridgewater approximately $700 million in fees over the years while the hedge fund's returns in risk parity products (Pure Alpha, All Weather, and Optimum funds) consistently lagged comparison benchmarks.
  • • David McCormick, who served as Bridgewater president and CEO from 2009–2022, faces political and fiduciary scrutiny over the pension fund's investment decisions, with critics arguing his tenure at the hedge fund coincided with poor allocation decisions that harmed teachers' retirement security.
  • • The underperformance contributed to a 2020 financial misstep that forced nearly 100,000 teachers to pay higher contributions to cover losses, while critics estimate the fund's overall strategy has cost property taxpayers at least $460 million in additional local school district property taxes.
  • • PSERS's broader investment strategy—including allocations to unconventional assets such as Iraqi oil fields and prison phone call infrastructure—has drawn criticism from governance advocates and union representatives, amid an ongoing FBI investigation into the $64 billion public school pension fund.
Summary
Pennsylvania's Public School Employees Retirement System (PSERS), which manages approximately $70–72 billion in assets for 500,000 retired teachers, principals, and school employees, has dramatically curtailed its relationship with Bridgewater Associates, the world's largest hedge fund, following years of disappointing returns. In August 2020, PSERS's board voted unanimously to withdraw $2 billion from Bridgewater, citing consistent underperformance relative to the fund's internal benchmarks.

The investment relationship between PSERS and Bridgewater began in 2012 when the pension fund allocated slightly more than 1 percent of assets to a Bridgewater risk parity strategy designed to generate returns during market downturns. A second similar fund was established in 2015. However, over the subsequent years, returns from Bridgewater's flagship products—including Pure Alpha, All Weather, and Optimum hedge funds—consistently underperformed, according to PSERS trustees. The accumulated cost to the pension system was substantial: PSERS paid Bridgewater nearly $700 million in management and performance fees despite these disappointing results.

The decision to reduce Bridgewater exposure became politically contentious in Pennsylvania's 2022 Republican primary for U.S. Senate, where billionaire hedge fund executive David McCormick faced scrutiny for his role as Bridgewater's president (starting in 2009) and later CEO. McCormick's tenure at Bridgewater overlapped precisely with PSERS's underperformance and the subsequent investment decisions that critics argue exacerbated the pension fund's structural challenges. Competitor Mehmet Oz seized on the issue, claiming McCormick enriched himself while teachers bore the financial consequences.

The broader PSERS crisis extended well beyond Bridgewater. A significant 2020 financial misstep forced nearly 95,000 teachers to increase their pension contributions to offset losses. Property tax advocates have estimated that PSERS's investment strategies—which included allocations to unconventional assets such as Iraqi oil fields and prison telecommunications infrastructure—ultimately cost property owners at least $460 million in additional local school district property taxes. These governance failures coincided with an ongoing FBI investigation into the pension fund and findings from PSERS's own consultants that the board suffered from poor leadership and a fundamental lack of trust among fiduciaries.

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Inquirer How PSERS pension plan fell out of love with Bridgewater, the world’s biggest hedge fund