The hedge fund business is a great deal for those who run hedge funds. Typically, the managers charge a fee of "2 and 20" 2 percent of the value of the assets they're managing, plus 20 percent of the profits they produce.

The New York Times reports that one hedge fund baron, Barry Rosenstein, spent $147 million on an estate in the Hamptons, while another, Daniel Loeb, dropped $46 million on a painting by Mark Rothko.Whether hedge funds are a great deal for big institutional investors, like Pennsylvania's two big public pension funds, is another question.These investments supposedly offer a "hedge" against downtimes, with the understanding that they won't make as much money in the good times.In California, the state's huge public employee pension fund decided earlier this month that hedge funds aren't worth the huge fees they charge. California will switch some $4.5 billion to more conventional investments.One investment racked up $17 million of short-term losses, despite charging fees of $11 million.That move prompted Pennsylvania Auditor General Eugene DePasquale to call for a closer look at what investment fees Pennsylvania pension funds are paying and whether the results are worth the money.The Pennsylvania State Employees' Retirement System paid about $149 million in fees to hedge funds in fiscal year 2013, according to WITF, the public broadcasting station.The Philadelphia Inquirer has noted that "It's hard to know how much Pennsylvania SERS paid, since some SERS hedge fund fees aren't included in the agency's annual report."WITF also noted that it's not clear what the pension fund got after paying all that money, which is the point raised by Auditor General DePasquale.There's good reason to wonder what the payoff is for those big fees. The Inquirer has reported the sorry story of the state's investment with Tiger Management Advisors.At one point, that fund had $17 million of short-term losses for the Pennsylvania State Employees Retirement System, despite charging fees of $11 million.That investment, now terminated, was supposedly a low-risk way to "hedge" against bad outcomes, but the fund lost money, the Inquirer reported, "after a manager bet big on gold."Pennsylvania has been one of the most aggressive states investing in "alternative" vehicles like hedge funds. In 2012, The New York Times reported that Pennsylvania's state employees pension fund had "more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds."Those investments cost Pennsylvania $1.35 billion in management fees in the previous five years, according to the Times report.During that time, it appears Pennsylvania's state employees retirement system paid more and got less than other states did.Over the five-year period, Pennsylvania's annual returns were 3.6 percent. During that time, the New York Times report said the typical public pension fund earned 4.9 percent a year. And Georgia, which was barred by law from investing in high-fee alternative funds, earned 5.3 percent a year.Georgia's fees were a lot lower, too. For a pension fund about half the size of Pennsylvania's state employees fund, it paid just $54 million in fees over the five years. Pennsylvania paid 25 times as much for results that were significantly worse.Pennsylvania's two big pension funds are tens of billions of dollars short of being able to pay all the money they'll owe to retirees.One has to wonder whether one reason is that the funds are spending too much money on supposedly sophisticated investments that aren't worth the cost.It's a question the Legislature needs to answer.PennLive.com