UT endowment investing in Cayman Islands; details kept secret under law approved by legislature in 2017

The University of Tennessee’s endowment has pumped millions of dollars into private investment funds in recent years, including many chartered in the Cayman Islands, reports the Commercial Appeal, and UT officials university successfully lobbied the Tennessee legislature to pass a law last year that keeps the details of these and other “alternative investments” secret.

As stated in a note accompanying the article, it is part of an International Consortium of  Investigative Journalists project.

Under the new law, the university still must disclose basics such as the name of the fund and the amount of money in it. But it doesn’t have to disclose the fees the managers charge, or the specific companies in which the funds are invested, unless the managers agree.

“I think as a public university that relies partly on taxpayer money and donor money that is being funneled to these managers, I think that’s just unacceptable,” said Thomas Gilbert, a finance professor at the University of Washington in Seattle who studies endowments.

Rip Mecherle helps manage UT’s endowment as chief investment officer. He said he personally sought the new state law and that outside fund managers wanted it.

“There are managers who won’t work with people that don’t have these (rules) in place,” Mecherle said. “And as you can imagine, if the managers can afford to be choosy, they’re probably pretty good.”

Gilbert says managers fear they’ll lose business if the public knows the high fees they charge. He imagines managers telling institutions like UT that they’ll deliver the “awesomest” performance.

“And the money goes into the ‘awesomest‘ fund, and lots of money goes to the manager to build his beach house or her beach house,” Gilbert said, “and the taxpayers are not aware of it. I think this is completely appalling.”

The secrecy law and the university’s investments in funds based in the Cayman Islands reflect broader trends.

Alumni donations go into university endowments, which are invested.

… In the past, university endowments invested mainly in stocks and bonds.

But the proportion of endowment money in alternative strategies such as hedge funds has jumped dramatically, from 20 percent in 2002 to 52 percent in 2017, according to a Congressional Research Service report.

As of June 2017, the UT system’s total investment in private equity funds and what it calls alternative strategies — mostly hedge funds — equaled roughly $345 million, about 38 percent of all investments.

That doesn’t include other items sometimes considered alternative investments, such as natural resources funds.

That $345 million number includes at least $199.3 million in the Cayman Islands and other offshore settings. Those offshore investments represent about one in every five dollars in the endowment.

Note: The referenced legislation, was approved last year 31-0 in the Senate; 83-11 in the House. It was HB64/SB587, sponsored by Senate Education Committee Chairman Delores Gresham (R-Somerville) and House Education Administration and Planning Committee Chairman Harry Brooks (R-Knoxville).

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