Eight Kentucky government employees and retirees filed a lawsuit in the County of Franklin Circuit Court this week, seeking to recover losses from products three hedge fund managers sold to the Kentucky Retirement System.
The plaintiffs are seeking damages from Blackstone Group, KKR & Co./Prisma Capital Partners and Pacific Alternative Asset Management Co. for selling “custom-designed ‘black box’ funds of hedge funds they portrayed as capable of producing the high investment returns with safe diversification while providing downside protection.”
The Courier-Journal of Louisville first reported the lawsuit.
According to the lawsuit, KRS invested between $1.2 billion and $1.5 billion, or $400 million to $500 million each, in the three funds in August 2011. Based on the sales pitches, KRS trustees expected lower risk, increased liquidity and returns of 7.75% on an ongoing basis.
The investments delivered on none of these things, the lawsuit says, but “[T]hey did generate excessive fees for those hedge fund sellers, poor returns and ultimately losses for the funds, in the end damaging KRS and Kentucky taxpayers.”
The lawsuit also names several KRS board members, staff executives and consultants who, it alleges, breached their fiduciary duty in making the hedge fund allocations. In addition, it charges them with making decisions and projections that were “outmoded, unrealistic and even false actuarial estimates.”