How Hedge Funds and Private Equity Owe Their Success to Looting Worker Pensions, Not Brilliant Management.

“Some private equity firms have honed Chapter 11 as an efficient financial engineering tool for insider sales — and for dumping pensions.”

-Harvard economist, Elizabeth Lewis.

• Hedge and equity funds do not make their profitability by superior management skills but by slashing jobs and underfunding worker pensions.

• Evidence is emerging that they are not good investments at all.

• Despite this, government worker pension plans have been the major source of funding for job destroying private equity.

• Now Trump allows employers to also invest private employee pension funds in private equity.

The Myth of the Helpful Hedge Fund

Most of the research regarding hedge funds as a profitable investment is a little more than propaganda for predatory capitalism.

Harvard economists Bebchuk, Brav and Jiang conclude in a 2015 study that all the criticisms levelled at the predatory tactics of hedge funds are unfounded. Bechuk calls them ‘activist hedge funds’ and claims their tactics do not have a detrimental effect on long-term profitability for shareholders.

You will easily find the pro hedge fund Bebchuk study by searching about hedge fund effectiveness. It has been reproduced on several academic and business sites — usually with high praise. The search results listing for this report will fill the first two or three pages. Yet, there is a serious flaw in its fundamental hypothesis.

No harm to wealthy shareholders, yes — but what about workers?

In 2017, another study pointed out the flaw in the Bebchuk work. This study you will not find easily on a search. It has not been reproduced or praised on academic or business sites. If you find it at all, it will be on the third search result page or later. These economists agree with all of the upticks cited in the Bebchuk study, but — a very big BUT — as the equity/hedge fund shareholders won, somebody lost.

Economists Anup Agrawal and Yuri Lim noticed something Bebchuk and co overlooked: as the hedge fund returns to shareholders increased, employee pension funding decreased. It wasn’t superior business management that produced much of the profits for their members, but the ability to underfund worker pensions.

“Shareholder gains from activism appear to partly come from raiding deferred compensation promised to workers, and from taxpayers via PBGC [ Pension Benefit Guarantee Corporation] guarantee”.[1]

How to Make Money in a Bankruptcy: The Well Engineered Bankruptcy

According to Harvard economist Elizabeth Lewis at least 51 companies have eliminated pension plans in bankruptcy at the behest of private equity firms since 2001. (Lewis, June 23, 2015)

Take the case of a business owner who has personal wealth of, or can borrow, $21 million and a company with assets of $100 million but debts, including the employee pension plan, of an equal amount.

He puts that company into bankruptcy. The assets are put up for sale to the highest bidder clean of all debts including the employee pension plan. The highest independent bidder offers $.20 on the dollar. The owner then betters that bid offering $.21 on the dollar and gets to buy the company worth $100 million clear of all debts for $21million.

The private equity firm always has the cash to do exactly this. Eddie Lambert did it with Sears. See: The Tragedy of Sears: How Hedge Funds Profit from Bankruptcy.

How They Are Allowed to Underfund the Pension Plan

The hedge or private equity fund has the corporation that it controls invest in risky assets that promise high returns. The projected higher returns allow the employer to contribute less to the pension plan — and pay out the savings in dividends to the fund shareholders. When the investments don’t produce the estimated returns, the pension fund is underfunded.

The Agarwal and Lim find this is a common tactic in the hedge fund playbook:

“We find that targeted firms reduce employer contributions to the pension fund, which they justify by increasing the assumed rates of returns on plan investments. They also tilt plan investments toward riskier assets, in a failed effort to boost plan returns”.

Additionally, these authors point out that if the government pension fund reserve for that plan cannot cover the claim, the taxpayers may have to kick in.

Private Equity Loots Better.

It’s been such a successful tactic for hedge funds, you can bet that private equity has done even better with it. Since 2001:

• Private equity have dumped $1.592 billion in pension bills on to the PBGC through bankruptcy.

• Because pension insurance doesn’t cover all benefits, their actions have left some of the nearly 102,000 workers or retirees with lost benefits amounting to at least $128 million.

• And they’ve contributed to the chronic deficits at the Pension Benefit Guaranty Corporation. (Lewis, June 3, 2015 p6)

Federal Pension Fund Managers Help Private Equity Harm Workers

You may think what follows is a bit of fiction created by Frans Kafka. It has been called ‘labor assisted suicide’. The biggest source of funding for job-killing pension-looting private equity are the federal pension funds investing on behalf of millions of workers (Clayton, Jan 17, 2022).

Look at the immense investment power of just one state pension fund that supports private equity. The Washington State Investment Board (WSIB), which manages retirement and public funds for a number of state government employees, has been investing in KKR (Kohlberg Kravis Roberts & Co.) for over 30 years. It invested in 23 KKK funds (Vandervelde, June 24, 2018).

The WSIB makes no secret that it invests heavily in private equity firms as its website declares:

“The Investment team is composed of investment professionals who manage WSIB’s major asset classes, including public equity, private equity, real estate, tangible assets, and fixed income” [Bolding added].

Warning

It’s about to get even worse for employees. private equity funds will have a new and magnificent source of funds to gut pensions for dividends. Trump has opened the door for private equity to the $12 trillion held in US retirement plans. By executive order in August 2025, he directed loosening the restrictions on 401(k) pension plan eligible investments to include “alternative investments”, a very wide term that includes private equity and crypto assets (Thomas, June 12, 2025).

Private Equity Funds Are Poor Investments

While pension funds have made fund managers billionaires, the private equity returns have been no better to pension funds than if the funds had been invested in minimum fee index funds. That according to research by Oxford professor Ludovic Phalippou in a paper entitled (An Inconvenient Fact: Private Equity Returns & The Billionaire Factory).

Further, the report showed employee pension funds are minting billionaire managers from these fees. From 2006 to 2015, the private equity industry raked in $230 billion in incentive fees or carried interest (which is a disguised name for a type of fee), according to his research.

“This money went from companies and pensions to private equity fund managers. In 2005, there were three billionaires on Forbes’ list from the private equity industry. Last year [2019], there were 17 private equity billionaires.”

A study by Americans for Financial Reform on how working peoples’ retirements line billionaires’ pockets found that Florida pensions would have earned a billion dollars more between 1988 and 2011 if they had not invested in private equity. (AFR, July 30, 2025)

Why Private Equity is a Bad Investment

Apart from the absurd fact that pension fund managers use employee savings to destroy jobs, there are a few good reasons private equity are unnecessarily risky investments:

● Their management fees are higher than other investment advisors fees, even mutual funds.

● They are a dark market. Their financial statements are not subject to review by the SEC

● Unlike stocks, they are not liquid in that there is no immediate market for them. It’s like trying to sell a used car.

There Are Better Alternatives to Private Equity

This requires a little side journey into what an index fund is, and why its fees are so low. It does not require any active management, such as reading financial statements on a current basis, and the like. The theory is that the stock market in general usually goes up. Some stocks go up, some go down, but overall, the value increases.

If you try to pick a stock, you could lose. So, rather than doing that, take a sample of all the stocks in an index like the S&P 500. That sample is taken once at the beginning. Investors can buy into this fund as a type of mutual fund called an Exchange Traded Fund (ETF). Because there’s little active management, the fees are a bare minimum.

Warren Buffett made a famous challenge to all money managers world-wide claiming they could not beat the return of an index fund over a ten-year period ending in 2017. Only one dared to take up his challenge — and lost.

What Can Be Done?

Stop Supporting Job Killing Investments

● Voters can demand that federal pension funds stop investing in job killing hedge or private equity funds

● Employees can insist that their employers not let the managers of their pension funds invest in hedge or private equity funds

● Employees can require the managers for all pension funds to invest only in ETFs for the equity portion of the portfolio.

● Alternatively, set the managers’ commissions so that they are calculated on how much their gain, less their fees, beat the results of an ETF fund.

The result of the Buffet challenge has been known since 2017. So why are both private and public pension fund managers still investing in private equity and other investments and not just low fee ETFs for the equity part of the portfolio? It must be that employees don’t know what’s happening.

Stop The Looting of Worker Pensions

● If in a bankruptcy, worker pension funds are underfunded or there is no money for worker severance pay, all payments made to the private equity firm or to any person appointed by them to the target company are clawed back until both the pension and severance funds are fully funded.

● Prohibit the leveraged buyout. Stop private equity from making the acquired corporation responsible for the money borrowed to buy its shares. That loan should remain the sole responsibility of the private equity firm.

[1] See also this report for the American Federation of Teachers that makes clear that private equity performance as a whole has hardly been as impressive as the industry has claimed, and that it has worsened in recent years: Private Equity Report, 2021