For many years, Kentucky Retirement Systems, or KRS, was flush with cash. Then the dot-com bubble burst, causing major losses. Politicians were reluctant to raise taxes to pay the full cost of their bills, and began to divert pension money. Then came the 2008 recession. Suddenly, Kentucky Retirement Systems found itself on the hook for billions of dollars it didn’t have.

Starting in the fall of 2009, Kentucky’s public pensions decided that to dig out from under, they would invest a portion of their portfolio in hedge funds. Among the funds chosen were Blackstone Alternative Asset Management, Prisma Capital Partners, now a subsidiary of KKR; and Pacific Alternative Asset Management Co., which later merged with Prisma to form PAAMCO Prisma Holdings.

The funds are now facing a civil class-action lawsuit from some pensioners of Kentucky Retirement Systems, which alleges the funds generated “excessive fees… poor returns, and ultimately losses.”

PAAMCO and Prisma Capital declined to be interviewed by FRONTLINE, but PAAMCO Prisma Holdings provided the following statement:

“PAAMCO Prisma is proud of our almost two decades-long history of helping our clients achieve their investment goals. We are particularly proud of our work helping many state and corporate pension plans secure the retirements of millions of beneficiaries.

“Seven years ago, in the aftermath of the 2008-2009 financial crisis, KRS and its professional advisors conducted a competitive search process and selected PAAMCO and Prisma to manage a small portion of KRS’s investment portfolio in a manner that would reduce the overall portfolio’s exposure to downturns in the stock market.

“PAAMCO and Prisma did exactly what KRS hired them to do — pursue a diverse range of low-risk investment strategies not tied to the stock market. The investments earned well over $200 million dollars (net of fees) for KRS and its members. All of this was done transparently and in accordance with the terms of contract. The Kentucky lawsuit, which was brought by eight KRS members and their contingency-fee lawyers, ignores the governing contracts and is meritless.”