Daniel Loeb, founder of Third Point LLC, is escalating a battle between hedge-fund managers and American Federation of Teachers President Randi Weingarten over public-worker pensions.
Loeb, who manages $13.6 billion, had fellow hedge-fund chiefs Paul Tudor Jones, David Tepper and Paul Singer applauding in the ballroom of Manhattan’s Mandarin Oriental Hotel last month as he donated an extra $1 million to a group of charter schools to show his opposition to the head of the second-biggest U.S. teachers union.
In April, the union included the four billionaires on its “watch list” of money managers that support groups the labor organization said are hostile to traditional public pensions. The groups included StudentsFirst, an organization that backs eliminating tenure and funding charter schools at the same level as public ones.
“Some of you in this room have come under attack for supporting charter-school education reform and freedom in general,” Loeb told the audience. To show opposition to Weingarten, the “leader of this attack,” Loeb, 51, boosted his pledge to the nonprofit Success Academy Charter Schools in New York City, where he’s a director, to $3 million from $2 million.
States and municipalities seeking to boost returns for their retirement funds have invested billions of dollars with hedge funds. The AFT wants pension trustees to consider fund managers’ ties to groups that oppose defined-benefit retirement systems as a reason when hiring or firing them. Critics say that threatens the managers’ livelihoods.
“It’s a means to shut up organizations,” said Lawrence Mone, president of the Manhattan Institute for Policy Research, one of the groups highlighted by the union. (0597690D:US) The New York-based nonprofit, which says it promotes economic choice and individual responsibility, recommends that governments shift workers to 401(k)-type plans used by many companies.
Loeb, an activist investor who called for the breakup of Sony Corp. (6758) and successfully pushed Yahoo! Inc. (YHOO:US) Chief Executive Officer Scott Thompson to resign, is the only one of the 33 managers targeted by the AFT to push back publicly against the union.
Others on the list have folded.
Thomas McWilliams, a managing partner of New York-based private-equity firm Court Square Capital Partners, resigned last month, Mone said. McWilliams didn’t return a call seeking comment.
Cliff Asness, founder of Greenwich, Connecticut-based AQR Capital Management, won’t renew his term on the board of the Manhattan Institute when it expires in less than a year and will work to moderate the group’s position on defined benefits, said Dan Pedrotty, director of pensions and capital strategies at the union, citing e-mails and conversations with AQR principal David Kabiller.
Kabiller didn’t immediately return a call seeking comment.
Raymond Niemiec, a spokesman for the Manhattan Institute, said he couldn’t comment immediately on Asness’s status.
“For people who belong to the Manhattan Institute or support education reform, I think it’s important to make a determination -- what’s more important to you, your money or your principles,” Loeb said in a telephone interview. “For me, it’s my principles.”
Marge Wyrwas, a spokeswoman for AQR, said in a statement that Asness “is and will continue to be a board member of the Manhattan Institute.”
“He shares the institute’s respect for the power of liberty to better people’s lives,” she said. “Cliff’s mission is to work to ensure that all pension plans, very much including defined-benefit plans, continue to provide for the secure retirement of their beneficiaries, a vital national interest.”
Court Square has been removed from the AFT’s watch list and AQR will be taken off when Asness leaves the board, Pedrotty said.
AQR oversees $78.9 billion, as of March 31, said Wyrwas. The firm’s clients include the Teachers’ Retirement System of Illinois and Ohio’s Public Employees Retirement System.
Court Square oversees $6.8 billion. The firm manages assets for the California Public Employees’ Retirement System, the biggest U.S. pension.
Third Point, based in New York, handles investments for at least five public pensions, including the Employees’ Retirement System of Rhode Island, New Jersey’s pension fund and Ohio’s Public Employees Retirement System.
Loeb is a director of the New York affiliate of StudentsFirst, an organization founded by former Washington school Chancellor Michelle Rhee. It says defined-benefit plans are draining resources from classrooms and that governments should move to retirement plans that are “more sustainable,” according to the group’s website. The fund manager, who’s also a Manhattan Institute trustee, says he’s never taken a position against defined-benefit plans.
Weingarten says Loeb should address his conflict of interest.
“All we tried to do is get him to answer the simple question: about harmonizing his want to advise hundreds of millions of dollars of hard-working teacher pension funds while sitting on the board of StudentsFirst, which is a group that’s trying to kill their retirement benefits,” she said in a telephone interview.
“He probably has never had anybody respectfully and nicely ask him a question that he didn’t want to answer.”
Loeb says he represents the interests of public-school teachers and other government employees by earning a rate of return that exceeds pensions’ benchmarks. Third Point hasn’t lost any of its public-worker fund clients, Loeb said.
The Rhode Island pension’s $50 million investment with Third Point in January 2012 has returned 22.7 percent through April 30, according to a May report from the state Investment Commission.
Loeb’s firm is Rhode Island’s top global equity manager in the current fiscal year through April 30, returning 27 percent, according to the report. That compares with 20.23 percent for the Russell 3000 index, which Rhode Island uses as a benchmark. The Standard & Poor’s 500 index returned 19.5 percent, including reinvested dividends. The HFRI Equity Hedge Index returned 11 percent.
Joy Fox, a spokeswoman for state Treasurer Gina Raimondo, said the commission focuses on the investment strategies and performance, not the personal views of the managers associated with them.
The AFT released its investment manager list in April before a meeting of the Council of Institutional Investors, a nonprofit association of pension funds, endowments and foundations.
Loeb, who was to speak at the conference about corporate governance, backed out of the engagement, citing “false reports” about his stance regarding defined-benefit pensions, according to a letter he wrote the council.
The real motivation for the AFT targeting him isn’t StudentsFirst’s policy on pensions, Loeb said. Rather, it’s his support for changing education policy to focus on the needs of children.
Loeb is a director of the Success Academy charter schools which educate almost 5,000 students in 14 New York City facilities. He’s contributed millions of dollars to such institutions and groups that want to evaluate teachers based on student results and make it easier to fire poor performers.
“Rather than intimidate me, it had the effect of redoubling my commitment and making me realize how important our work is because these kids face such obstacles,” Loeb said of the AFT’s list in a telephone interview.
“Not only do they have the obstacles of their poverty and backgrounds, they’re up against a well-funded institution that’s methodically trying to undermine their education.”
Charter schools, usually privately run institutions funded with taxpayer money, operate without many of the rules governing public ones. Charter supporters say they offer a better alternative to failing schools, especially for poor students.
Teachers unions say that charter schools don’t enroll students from the poorest families or those with special needs. They say that money managers are using the charter movement to promote their ideological goals such as breaking unions.
In addition to Court Square, KKR & Co (KKR:US), the private equity firm led by billionaires Henry Kravis and George Roberts, was removed from the AFT watch list after the company wrote a letter to Weingarten pledging support for public pensions, said Pedrotty, a union official.
A foundation connected to Kravis previously contributed to the Manhattan Institute, the AFT said.
“This idea that you can take money from a fund and then have a huge conflict of interest, that’s ending,” Pedrotty said.
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