Economy & Business

California Pension Fund Board Slams CIO for Selling Off Hedges ahead of Coronavirus Market Downturn

A trader wears a mask on the floor of the New York Stock Exchange, March 20, 2020. (Lucas Jackson/Reuters)

Yu Ben Meng — the chief investment officer of California’s public pension who has ties to Chinese espionage — sold off the fund’s investments in hedges against market downturn without the approval of the pension’s board, a move that cost the fund a billion-dollar payout following the coronavirus market crash.

The Wall Street Journal reported last week that Meng, who assumed his role as CIO for California Public Employees’ Retirement System (CalPERS) — the country’s largest public pension fund — in January 2019, reportedly made no mention of the fact that he had mostly exited the three funds when asked about them during a March teleconference with the board.

“They should perform well in this kind of a down market, as they were exactly designed to do,” Meng answered, according to a call transcript. “And from what we know . . . most of these strategies are performing as anticipated.”

Board members told the Journal that they had not been aware of the shift in investment strategy, which CalPERS began in 2017 by investing in three “tail risk” funds, which deliver big payoffs in the case of market downturns.

“He took away a risk strategy that the board had approved without telling the board,” board member Margaret Brown, who asked Meng about the funds, told the Journal.

Meng told the Journal that the move was part of a broader strategy to cut costs and shift funds to higher returns. “Knowing what we know, we would make the exact same decision,” he stated. The fund began exiting the positions in October — before news of the coronavirus pandemic — and by March it only had a residual stake in one of the funds, LongTail Alpha LLC, that returned less than $200 million.

LongTail reported in an investor letter that it had a March return of 156 percent. Another fund that CalPERS withdrew from, Universa Investments LP, said it returned 3,612 percent.

The CalPERS board is scheduled to meet this week to discuss “how much authority it delegates to investment staff.” Meng came under fire earlier this year after being accused of participating in China’s “Thousand Talents Program,” which provides secret funding to U.S. academics and entrepreneurs in exchange for valuable information.

Meng emigrated to the U.S. from China to study at the University of California, Davis, and worked as deputy CIO for China’s State Administration of Foreign Exchange (SAFE) — which oversees China’s U.S. Treasury security holdings — prior to his appointment at CIO. A 2017 interview Meng gave to a Chinese state-sponsored newspaper mentions his role in the program, and includes comments from Meng saying “in human life, if there is an opportunity to serve the motherland, such responsibility and honor cannot be compared to anything.”

Under pressure from Representative Jim Banks (R., Ind.), CalPERS CEO Marcie Fros did not deny that Meng had been recruited to the “Thousand Talents Program,” but called the allegation that he was serving Beijing’s interests “baseless.”

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