Hedge fund drops Kentucky pension fund over ethics requirement

(Reuters) - A New York-based hedge fund is ending a $68 million investment by the Kentucky Retirement Systems, citing new code of conduct requirements imposed by the state, as well as ongoing litigation, the system's executive director said on Thursday.

David Eager said the decision by Davidson Kempner Capital Management was a first for the $17 billion public pension system, which has been holding discussions with investment managers about adhering to CFA Institute code of ethics and standards of professional conduct as required by a 2017 Kentucky law.

"We wanted to place more money with them. They expressed concern about the requirements of Senate Bill 2 with regards to the CFA codes," he said in an interview, adding that the "push back" centered on the firm lacking an affiliation with the CFA Institute.

The firm declined to comment on the matter.

Eager said the hedge fund also expressed concern over a lawsuit filed last year against retirement system officials and three asset management firms. The case, which does not involve Davidson Kempner, was brought by a group of Kentucky state workers citing a breach of fiduciary duties that allegedly led to high-risk and high-fee investments.

Kentucky has one of the nation's most underfunded public pension systems, with funded ratios for its five funds as low as 13.6 percent and as high as only 54.1 percent.

Legislation aimed at addressing the unfunded pension liability by reducing retirement benefits and other measures was voided as unconstitutional on Wednesday by a Franklin Circuit Court judge on grounds it was not validly enacted.

Elizabeth Kuhn, a spokeswoman for Kentucky Governor Matt Bevin, said the ruling will be appealed, noting that it could lead to the invalidation of hundreds or even thousands of bills passed by the legislature using the same process.

(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)