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

At the peak, the PSERS retirement plan gave almost $5 billion to Bridgewater Associates to invest, paying it among the plan’s highest fees, as well — nearly $700 million since 2004. Bridgewater was the plan’s biggest outside money manager.

Bridgewater’s former chief executive David McCormick is proud of his years there. On his website touting his candidacy to represent Pennsylvania in the U.S. Senate, McCormick says he led “one the most successful investment management companies in the world.”

But the PSERS pension fund has not always shared in that success.

In the last two years, PSERS, the $75 billion Pennsylvania’s Public School Employees’ Retirement System, has massively cut its stake with Bridgewater, citing poor results.

PSERS reported owning four Bridgewater funds as of two years ago. Of those, PSERS has since sold two. And in October, the plan’s board ordered the sale of all of its remaining hedge funds, including Bridgewater’s Pure Alpha product, the plan’s largest such investment. That will leave it with just one Bridgewater fund, a more conservative bond product.

Now, rival Republican candidate Mehmet Oz, who polling says is McCormick’s closest competitor in the GOP primary, is using his company’s record against him. “Dishonest David got rich, we got stuck with the bill,” he declared at a March 15 news conference outside PSERS headquarters.

McCormick’s campaign staff did not make him available for an interview. In a recent interview with a Scranton-area radio station, he called Oz’s attacks unfair. Even after Bridgewater’s fees were paid, McCormick said, the pension plan made $4 billion in profits from its Bridgewater investments — a sum confirmed by PSERS.

“Not a single teacher, not a single pensioner from PSERS has ever lost a dollar based or a penny based on Bridgewater,” said McCormick, who stepped down in January to run for the U.S. Senate. “And it’s been a very successful relationship.”

Bridgewater didn’t lose money. But as PSERS board members have pointed out, PSERS would have earned a lot more over the years by putting the money into U.S. stocks, with much lower fees, instead of sending it to Bridgewater with its hedge fund strategies.

Bridgewater’s Pure Alpha fund — Alpha is financial jargon for returns above the market averages — has lagged behind PSERS’s benchmark for funds in its hedge fund category. It posted a yearly profit of 4.6% over the last five years, well below the 6.7% average profit made by other funds that PSERS uses as a comparison.

Worse, according to critics on PSERS’s own board, hedge funds overall have trailed the U.S. stock market in recent years: The S&P 500 index of big U.S. company stocks jumped almost 17% annually over the last five years.

PSERS’s two Bridgewater risk-parity pools, called the All Weather and Optimum hedge funds, fell even further behind comparative funds. Their performance was so troubling that PSERS sold off its $1.1 billion investment in them in 2020.

“This did terrible,” Thomas Bauer, a top PSERS investment expert, told its board that year, “which should make us mad. A manager we paid a lot of money to that was supposed to do well in a crisis.”

The pension plan’s critics, who include Republican state Treasurer Stacy Garrity and her Democratic predecessor, Joe Torsella, who are both on the board, argue that PSERS would have earned billions more if it had put the hedge fund money in stock index funds.

The harsh political debate over Bridgewater’s performance is yet issue another roiling PSERS, which has been whipsawed for months by a pair of federal investigations and growing dissatisfaction on the board about its lackluster financial performance. The turmoil reached a climax late last year when the fund’s chief executive and chief investment officer resigned.

Probes by the FBI and the U.S. Securities and Exchange Commission continue. They have been investigating a range of issues that include the board’s adoption of an incorrectly high figure for investment profits, its purchase of real estate near its Harrisburg offices, and suggestions that staff may have accepted gifts from outside vendors. No one has been charged.

The board later recanted the profit figure, a step that then required the fund to hike the payments into the retirement plan by 100,000 working teachers and other school staff.

As for PSERS’s overall performance, a 2019 report by a blue-ribbon Pennsylvania pension commission, a 2020 report by Pew Charitable Trusts and, most recently, a March report by a PSERS consultant, CEM Benchmarking, all ranked PSERS behind similar public funds.

CEM, a Toronto firm, reported that the retirement plan overall had profits of 9% over the last five years while its peers had a rate of 9.5.%, a gap that cost the plan more than $300 million a year, given the system’s size. The study attributed the difference to PSERS’s decision to put three-fifths of its billions into so-called alternative investments — typified by hedge funds such as Bridgewater’s — more than double the alternative investments of other pension plans.

Even after PSERS cut off its investment in Bridgewater’s risk parity hedge funds, Bridgewater received far more in fees than the scores of other investment firms that do business with the Pennsylvania pension plan. It was paid $47 million for the fiscal year ending June 30, 2021, the most recent year for which figures are available and the year in which the risk parity fees went away. No other firm received as much.

Not coincidentally, Bridgewater has charged the pension plan among the highest rates the system pays, according to a study by another consultant. Verus Capital Partners, based in Seattle, told the board earlier this month that Bridgewater’s fees, as a percentage of money invested, dramatically exceeded more than 50 other comparable funds.

According to PSERS figures, Bridgewater’s peak year for payments as a PSERS money manager was 2019. That fiscal year, it collected $59 million for overseeing a PSERS investment of $4.9 billion.

Celebrity doctor Oz and McCormick are both wealthy. Critics have pointed out that both moved only recently to Pennsylvania to pursue their political ambitions, Oz from New Jersey and McCormick from Connecticut, where Bridgewater is based.

Oz was initially the front-runner in a crowded fielding seeking the GOP senatorial nod, but polling from earlier in March found that McCormick has pulled ahead. McCormick’s rise has been fueled by more than $14 million in ads purchased by McCormick and an allied super PAC.

Much of that money has been used to attack Oz, who has come out swinging hard against McCormick, as shown by his news conference outside the PSERS offices.

In McCormick’s defense, his campaign said that PSERS had asked Bridgewater to follow conservative investment strategies after the 2008 market crash.

At Bridgewater, McCormick focused on operations and sales, not investment strategies. His function was to oversee the fund’s 1,500 employees and to cultivate clients, among whom PSERS loomed large.

The hedge fund was founded in 1975 by a charismatic leader, Ray Dalio, who stepped away from the top job when McCormick became co-executive director in 2017 after joining the firm eight years before. McCormick became the sole executive in charge in 2020.

Dalio’s reputation got a boost when his funds, unlike those of many rivals, reported profits despite the 2008 financial crash.

At his firm’s headquarters in Westport, Conn., Dalio fostered an atmosphere — one that some called “cult-like’ — in which his financial staffers, senior or junior, are encouraged to vigorously critique each other. Conversations are tape-recorded and stored in a “transparency library” so that all employees can review them. Dalio says this keep remarks honest and discourages “spin.”

For PSERS’ investment cadre, Westport has been a common destination. About 20 members of the staff have run up charges of about $23,000 in Bridgewater-related travel. Many have headed to Connecticut, while a few have also headed to Bridgewater-sponsored sessions in Beverly Hills, Beijing, and Hong Kong.

Staff writer Jonathan Tamari contributed to this article.