New York City's largest public pension is exiting all hedge fund
investments in the latest sign that the $4 trillion public pension
sector is losing patience with these often secretive portfolios at a
time of poor performance and high fees.
The board of the New York City Employees
Retirement System voted to leave blue chip firms such as Brevan Howard
and D.E. Shaw after their consultants said they can reach their targeted
investment returns with less risky funds.
The move by the fund, which had $51.2 billion in
assets as of Jan. 31, follows a similar action by the California Public
Employees' Retirement System (Calpers), the nation's largest public
pension fund, and public pensions in Illinois.
"Hedges have underperformed, costing us
millions," New York City's Public Advocate Letitia James told board
members in prepared remarks. "Let them sell their summer homes and jets,
and return those fees to their investors."
"Hedge funds are charging exorbitant fees for high-risk and opaque investments," said a public advocate.
The move is a blow to the $3 trillion hedge fund
industry where managers like to have pensions as investors because they
leave their money in for longer than individuals, sending a signal of
stability to other investors.
Hedge fund returns have been lackluster for some
time. The average fund lost about 1 percent last year when the stock
market was flat, prompting institutional investors to leave.
Research firm eVestment said investors overall
pulled $19.8 billion from hedge funds in January, marking the biggest
monthly outflow since 2009.
Performance at some of the funds with which New
York City invested was far worse. Luxor Capital Group, a long-time
favorite with many pensions, lost an average 18.3 percent a year for the
last two years.
New York city's public pension system has five
separate pension funds with individual governing structures. The system
has total assets of $154 billion, with about $3 billion invested in
hedge funds as of Jan. 31.
NYCERS had $1.7 billion invested in hedge funds
at the end of the second quarter 2015, according to its financial
report. That amounted to 2.8 percent of total assets and was the
smallest portion of its 'alternative investments' portfolio, which
included $8.1 billion in private equity.
Unaudited data from the city Comptroller's office showed NYCERS' hedge fund exposure was $1.4 billion as of Jan. 31.
Comptroller Scott Stringer, a trustee, said
eliminating hedge funds would help NYCERS construct a "responsible
portfolio that meets our long-term investment objectives."
NYCERS paid nearly $40 million in fees to hedge
funds during its 2015 financial year, while its hedge fund portfolio
returned 3.89 percent over the year, according to its financial report.