Hedge-fund investment debate is not unique to R.I.

GOOD INVESTMENT? Gordon H. Dash, professor of finance and decision science at URI, says the graph of a good hedge fund tends to mimic the market as a whole. / COURTESY URI
GOOD INVESTMENT? Gordon H. Dash, professor of finance and decision science at URI, says the graph of a good hedge fund tends to mimic the market as a whole. / COURTESY URI

Hedge funds are a polarizing topic across the country, but the Rhode Island state pension system’s investment in them at a time of major benefit cuts has drawn a backlash. University of Rhode Island finance professor Gordon H. Dash has researched hedge funds, hedge-fund forecasting and the use of neuroscience to inform hedge-fund investing. He teaches students the principals behind hedge funds and this year is organizing URI’s first student-run hedge fund.

PBN: Is the debate going on about hedge-funds investment by pension systems in Rhode Island occurring across the country?
DASH: Without a doubt. Not only the nation but this is a global question for investors everywhere. Hedge funds have always been an entry to the global community because there is constantly a desire by investors to earn higher and higher rates of return. That is particularly true today when the rates of return on conservative investments are so low. The risk may be low, but the returns are also low, which makes it more difficult for the average working person who is just saving for retirement to accumulate sufficient capital to maintain the lifestyle they have become accustomed to.

PBN: So is the debate whether hedge funds are too risky or too expensive to get a good return?
DASH: Those are the broad-based questions but those questions are too broad to really understand what investors are attempting to evaluate when they use the term “hedge fund.” The term is really “hedge fund and alternative investments,” and what that means is an investment other than equity, or fixed income, which would be corporate debt, treasury debt or municipal debt. When you look at hedge funds, they offer several different approaches to managing risk and return. If you look at a site like hedgeindex.com, which tracks hedge-fund performance, you will see all kinds of different hedge-fund styles like convertible arbitrage, dedicated-short bias and long/short equity, which is the style I teach in my class. If you look at a graph of a good hedge fund, the value tends to mimic the market as a whole. When it is going up you want your hedge fund to at least meet, if not exceed, the rate of growth of the broad-based market index. However, when that index turns down because of market conditions and the economy, the short positions and other alternative positions you have chosen should buttress the overall value of the fund. It may go down, but not as much as the market. And in a really good hedge fund, you will hold even and not have a loss, even in a bear market.

PBN: That sounds like the reasoning that [R.I. General Treasurer] Gina Raimondo has offered for putting pension investments in hedge funds: that they are a kind of insurance policy against another market downturn. But of course hedge funds come with high fees. Is there any other less expensive, alternative way to get that kind of downside market protection?
DASH: No, not really. Treasurer Raimondo has given correct information in that regard. … The reason for these fees is that these are highly skilled individuals performing a task that requires some of the best technology in the industry and a broad depth of knowledge across a number of asset classes. Not just debt or equity, but tens of thousands of options contracts, futures contracts and pulling that together in a mathematical way that supports the growth of your underlying portfolio over time while assuring that you do not experience a collapse in a bearish market. The fall is usually a lot less than the market as a whole and that is important to public investing because these investment dollars are tied to people’s pensions, their future expectations.

PBN: Hedge fund supporters often point to elite college endowments, especially Yale University, as examples of how to manage large amounts of money. But are states and smaller municipal investors on the same playing field as those huge endowments?
DASH: They are not inherently different, but unfortunately in the public sector, where the leaders of the investment teams are for the most part elected officials, every two or four years you might have a change in the overall view of how these funds should be managed. That’s compared to the academic environment where they have access to the best academic research and where there tends to be consistency of thought as well as a pyramiding of the growth of the latest academic trends and how those trends can best benefit the management of risk and return through an investment vehicle.

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PBN: More and more pension funds across the country have started using hedge funds in recent years, but do you see political backlash rolling some of that back now?
DASH: There is no doubt the political backlash is pretty extreme, because it has elevated a lot of popular terms without a lot of understanding of how they come together to guide a substantial investment program. It may put a damper on the future of the willingness of those who manage public pension funds to include hedge funds and alternative investments in the future. That would be a mistake, because there are hedge funds that do a very good job at achieving that twin objective: to mimic, if not exceed, the rate of growth of a popular benchmark, while during market downturns to experience less, and sometimes substantially less downturn. •

INTERVIEW
Gordon H. Dash Jr.
Position: Professor of finance and decision science, University of Rhode Island
Background: A New Jersey native, Dash arrived at URI in 1974 fresh out of graduate school and has been teaching, researching and consulting since. While his early research centered on banking structure and traditional finance, Dash has begun branching out in recent years into modeling markets through neuroscience and using artificial intelligence in trading.
Education: Bachelor’s in business administration from Coe College, 1968; master of business education from the University of Colorado, 1974; Ph.D. in finance and operations research from the University of Colorado, 1978
First Job: Collecting data for the United Parcel Service’s industrial-engineering department during the summer
Residence: Providence
Age: 66

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