Mitchel Whitehead and Carrie Grove Published in Benefits & Compensation Digest ”Investing Pension Assets in Alternative Investments”

Mitch Whitehead and Carrie Grove’s article, “Investing Pension Assets in Alternative Investments,” was published as the feature article in the August issue of Benefits & Compensation Digest. Since “[p]ension plan investment consultants recommend allocations to private equity and/or hedge funds with increasing frequency,” as Mitch and Carrie note in their article, many questions have arisen about the differences between such ‘alternative’ asset classes and more traditional investment vehicles. Mitch and Carrie’s article outlines “the key legal differences between investing in alternatives and investing in more traditional asset classes using an investment manager.” They note that because alternatives are unlike more traditional investment vehicles, they “can raise issues under ERISA’s plan asset regulations and can create unrelated business taxable income (UBTI) for the plan.”

In their article, Mitch and Carrie provide the answers to such frequently asked questions as: What are alternative investments and how are they made? How does a pension plan invest in alternatives? Under ERISA, may a pension plan invest in alternative investments? Under ERISA, may pension plan trustees delegate authority to a third party to select the investments (and underlying investments) for the plan? What process should pension plan trustees follow in selection of a hedge fund, private equity or other manager? and Under ERISA, may pension plan trustees rely, in whole or in part, on the recommendation of an investment consultant to satisfy their fiduciary duty?

The authors conclude that “pension fund trustees must be equipped with an understanding of the fundamental differences between traditional investing using an investment manager and the direct investment in limited partnerships, LLCs or other interests in hedge fund or private equity investments. Once trustees and their advisors understand these differences, they will be better positioned to evaluate the legal risks and rewards of alternatives and to conduct the type of due diligence required under ERISA’s fiduciary responsibility rules.”