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Having Fun With A Fund

by Knight Allen, NSC Director of Legislation
Published on  August 09, 2012 - reprinted with permission

     Every once in a while a newspaper story gets a little closer to our own lives than most of them do. I had that happen on 8/2 with a headline in the RJ’s business section: “Manager for Fund Designated.”

      In 2011, our glorious legislature decided to draw $50 million out of the $310 million Nevada Permanent School Fund and hand it over to Wall St. The well intentioned (as always) idea is to get that $50 million to earn a better return than the School Fund has been getting since it is 100% invested in U.S. government fixed income securities earning less than 1%. So what is wrong with this? Out side of everything, I guess not much.

      First, bureaucracy. They created at least two new panels: the Nevada Capital Investment Corp. to run something called the Silver State Opportunity Fund LLC (which is where the $50 million from the Nevada Permanent School Fund sits). Are you still awake?

      Next they give the $50 million to Hamilton Lane, a private equity funds-to- funds manager. What's that? It's a fund that aggregates capital, raking off a sweet fee for itself, then distributes the remaining money out to other funds which rake off sweet fees for themselves. Then add in the trading costs which have practically no transparency and that $50 million has taken a solid body blow before it even starts. Speaking of fees, this line in the article really jumped out at me: "Hamilton Lane's fees will be paid out of earnings or principal depending on how the fund performs." Like that? Heads they win, tails we lose or as the pundit said this is a classic example of socializing risk and privatizing profit. Mind you, this will happen year after year after year (it's a ten year contract).

      Then, to pretty much ensure the fund will underperform 70% of the money must be invested in Nevada based businesses and 100% of whatever portion is earmarked for venture capital must be put into Nevada based startups. The potential for crony capitalism run amok is mind blowing.

      The whole thing is designed to produce mediocrity at best and total disaster at worst. Why is it being done? Because interest rates are being kept at obscenely low levels by the Federal Reserve to finance a level of government debt creation unheard of in world history.

      How many of you have been forced out of secure CDs and on to Wall Street? It is not going to end well, I can promise you that. Wall St. does not exist to make you rich. It exists to make the brokerages, banks and Street hustlers rich, mostly at your expense. Stay away from them. Don't give them your hard earned money. If you feel you must invest get a couple of books by John Bog1e, then go to Vanguard or Fidelity (I have no financial interest in either) and buy a low cost mutual fund or exchange traded fund (ETF) that looks like it might serve your needs.

      In my opinion, Wall St. is 99% humbug. Remember that and you can actually do OK over time. Forget it and you'll wind up just as jerked over and shafted as the Nevada Permanent School Fund is going to be.

  Knight can be reached at: