NYC pension funds near goal of $3.5 billion in hedge fund investments
The New York City Retirement Systems is transitioning from fund of funds to direct hedge fund investments
By Christine Williamson | February 18, 2013
The New York City Retirement Systems is two-thirds of the way toward completing investment of a $3.5 billion hedge fund portfolio on behalf of three of the city's five pension plans.
Once the remaining $1.2 billion is invested directly in single-strategy hedge funds — likely by the end of this year — the four-person hedge fund investment team in New York City Comptroller John C. Liu's office will tackle dismantling the $450 million in a commingled hedge fund of funds managed by New York-based Permal Group and reinvesting that money directly in hedge fund strategies.
“From the start, our plan has been to have direct investments in between 15 and 20 hedge funds. Permal Group has known from the outset that we would move out of its hedge fund of funds,” Seema R. Hingorani, director of public equities and hedge funds in the comptroller's office, said in an interview.
Another destination for part of the Permal assets might be an emerging manager hedge fund of funds, Ms. Hingorani said.
“We really want to support emerging hedge fund managers, but it may be easier given the size of our staff to use a niche hedge fund of funds,” she said. No time frame has been set for a search.
The comptroller's Bureau of Asset Management invests the $127.5 billion in aggregate assets of the five New York City pension funds at the direction of each fund's board of trustees.
It has taken eight years to reach this point. Investment staffers began educating trustees of each of the city's pension plans about hedge funds in January 2005, according to Pensions & Investments' archives.
It wasn't until mid-2008 that trustees authorized hedge fund allocations and searches for funds-of-funds managers for the $43.1 billion New York City Employees' Retirement System, the $26.8 billion New York City Police Pension Fund and the $8.5 billion New York City Fire Department Pension Fund.
The first hedge fund investments by the three funds didn't happen until March 2011, however, when Permal Group was awarded $250 million from NYCERS, $150 million from the policemen's fund and $50 million from the firefighters' fund. Permal was funded in July 2011, according to a transaction report provided by the comptroller's office.
NYCERS' hedge fund allocation now is 4% while the police and fire funds both have a 5% allocation, said Ms. Hingorani. All three boards have retained discretion over investment in individual hedge funds and must approve staff recommendations.
Trustees of the $45.8 billion Teachers' Retirement System of the City of New York and the $3.2 billion New York City Board of Education Retirement System have not authorized hedge fund investments.
Alpha, diversification split
Since the outset of hedge fund investing in 2011, in order to meet the twin goals of achieving a net 8% to 10% annual return with volatility between 5% and 7% of that of the Standard & Poor's 500 stock index, assets in the portfolio are divided equally between alpha-generating hedge fund strategies and those diversifying investment approaches that provide a return stream uncorrelated to returns of public equity and public fixed income, Ms. Hingorani said.
The hedge fund team has four broad strategies — global macro/tactical trading, long/short equity, relative value and event-driven. Tactical trading, long/short equity and the long/short equity subset of relative value approaches are included in the diversification category; event-driven and the long/short credit relative value strategies are part of the return-driver portfolio, Ms. Hingorani said.
Permal's hedge fund-of-funds strategy uses the same 50-50 split of assets into alpha generating strategies and diversifying approaches, Ms. Hingorani said,
In 2012, less than six months after the initial hedge fund-of-funds investment, her staff had already begun to cherry-pick hedge funds for direct investment from Permal's lineup. For example, in January 2012, Brevan Howard Asset Management LLP was moved out of Permal's portfolio and received a total of $350 million for direct investment in a global macro/tactical trading strategy from the three NYC funds.
Since the start of 2012, Ms. Hingorani's hedge fund team made six more large direct investments in single-strategy hedge funds:
- D.E. Shaw Group, Brigade Capital Management LLC and Caspian Capital LP received investments of $350 million, $200 million and $150 million, respectively, in credit-oriented relative value strategies.
- BlueCrest Capital Management LLP and Cantab Capital Partners LLP each received $200 million for global macro/tactical trading approaches.
- Fir Tree Inc. was awarded $250 million for investment in an event-driven strategy.
Names of the commingled funds the pension funds invested in from these managers are not publicly available, said Michael Loughran, a spokesman in the comptroller's office.
With managers in the diversifying portfolio mostly in place, the 2013 search docket will focus on finding equity-oriented event-driven hedge funds and portfolio managers skilled at investing in the long/short credit sub-set of relative value investing for the return-generating portfolio, said Ms. Hingorani.
Plenty of equity already
Ms. Hingorani said the New York funds don't have any direct investments in long/short equity hedge funds yet, a situation that's likely to continue because “I have $69 billion invested in U.S. and international public equities. We have plenty of equity exposure in the portfolio.”
What money will be directed to long/short equity strategies will be in low net, market-neutral strategies to lessen market exposure, she said.
The hedge fund team doesn't use an RFP process, relying instead on an “open-door policy” that brings two or three hedge fund managers a week into the office for interviews.
Ms. Hingorani said many other hedge fund managers are found through her contacts in previous jobs as a hedge fund portfolio manager and equity analyst, and those of her boss, Lawrence M. Schloss, deputy comptroller for pensions and chief investment officer of the Bureau of Asset Management.
Other hedge fund investment ideas come from Permal and the pension fund's hedge fund consultant Aksia LLC.
“I feel good about our partnerships with these outside advisers. We work closely with them and it means that we have three perspectives on managers we are considering,” Ms. Hingorani said.
Fees are “a big item on our agenda,” Ms. Hingorani said. “I have gotten some managers to lower fees ... some managers are easier to persuade than others.”
When the hedge fund team has high conviction about a hedge fund manager, a refusal to lower fees is not necessarily a knockout factor, she noted.
The total hedge fund portfolio performed well in 2012, its first full year of operation, Ms. Hingorani said, returning 7.99%, 214 basis points more than the fund's customized hedge fund benchmark.
This article originally appeared in the February 18, 2013 print issue as, "NYC funds are nearing goal of $3.5 billion in direct investment".