NYCERS pulls the plug on hedge funds

As trustees of the New York City Employees' Retirement System voted last week to liquidate its hedge fund holdings, the nation's largest public pension fund shared an update of its own exit plans: CalPERS has reduced its hedge fund investments by more than 80% since divulging plans to divest.

With its announcement on April 14, NYCERS became the latest large public plan to reduce or eliminate hedge fund holdings, an investment that has drawn fire from critics over disappointing returns, lack of transparency and fees.

Hedge funds represent about 2.8% of NYCERS' total pension fund assets of $51.2 billion.

In approving the hedge fund resolution, NYCERS trustees noted that the fund's consultant, San Francisco-based Callan Associates, conducted a review that “demonstrated that hedge funds can be removed from the NYCERS asset mix to achieve targeted levels of return and maintain consistent levels of volatility.”

“We have not seen the results that we had expected,” said trustee Henry Garrido. Mr. Garrido, who offered the resolution, is executive director of District Council 37, American Federation of State, County and Municipal Employees.

NYCERS started investing in hedge funds in March 2011. Its hedge fund portfolio's annualized return for the three years ended June 30, 2015, was 6.54% gross of fees, compared to the benchmark 7.29% gross of fees, according to NYCERS' latest annual report.

Plan trustees didn't set a timetable for disposing of the $1.45 billion in hedge fund assets the fund held as of Jan. 31, 2016, recommending that liquidation take place “as soon as practicable, in an orderly and prudent manner.”

Could take some time

Based on CalPERS' experience, liquidating the NYCERS portfolio could take some time.

CalPERS announced in September 2014 that it would eliminate its $4 billion hedge fund program, citing complexity, cost and scale. Hedge funds then represented about 1.3% of CalPERS' assets.

As of Dec. 31, 2015, the $290.7 billion California Public Employees' Retirement System, Sacramento, held only $463 million in hedge fund investments.

“The program has been eliminated and staff reassigned,” Joe DeAnda, a spokesman, wrote in an e-mail.

CalPERS said at the time that the process would take about a year. But as Mr. DeAnda noted in his e-mail, “the one year exit timeline was always an estimate.”

Mr. DeAnda didn't provide information on where the hedge fund money was reassigned, except to say liquidated funds “get reinvested into the portfolio according to our asset allocation targets.”

Unions have been among the fiercest hedge fund critics.

The American Federation of Teachers co-authored a report in November recommending that 11 large public pension plans conduct asset allocation reviews to find “less costly and more effective diversification approaches” than hedge funds.

The report, co-authored by the Roosevelt Institute, identified NYCERS, the New York State Common Retirement Fund, Albany; the Employees' Retirement System of Rhode Island, Providence; the Massachusetts Pension Reserves Investment Management Board, Boston; and the Illinois State Board of Investment, Chicago, as among large public pension plans that should revisit their hedge-fund investing strategy.

Representatives from the Rhode Island, Massachusetts and New York State pension systems did not respond to requests for comment about whether they were reviewing their hedge fund investments.

The Illinois State Board of Investment announced in February it would lower its hedge fund allocation target to 3% from the current 10%.

In March, the board said it would launch nine separate RFPs for equity and bond managers totaling $3.2 billion. Most of the funding will come from terminating equity, fixed-income and hedge fund-of-funds managers, the board said.

Reducing hedge fund exposure to a 3% allocation could take 12 to 18 months, William Atwood, the board's executive director, told Pensions & Investments in March.

The AFT-Roosevelt Institute report also recommended that the New Jersey Pension Fund, Trenton, review its asset allocation strategy and hedge-fund investments to find “less costly and more effective diversification approaches.”

Last month, a coalition of public employee unions issued a report criticizing performance and fees for the $68.1 billion New Jersey pension fund's alternatives investments such as hedge funds and private equity. Hedge funds represented 12.4% of the total pension assets, as of Feb. 29.

The division of investment, which manages investments for the New Jersey fund, responded last month that this report contained “numerous” inaccuracies, unclear calculations and a “significant amount” of data mining and cherry-picking.

“The view that has been expressed by the State Treasury Department, Division of Investment, State Investment Council and nearly all industry experts is that a diverse portfolio, including hedge fund investments, mitigates risk and produces the best returns for beneficiaries over a substantial period of time,” said Christopher Santarelli, a Treasury Department spokesman, in an e-mail.

“We wish that the partisan groups leading the charge against these investments would not prioritize politics over what is best for the financial security of public pension fund beneficiaries,” he added.

In New York City, NYCERS is one of three city pension funds investing in hedge funds.

As of Jan. 31, the New York City Police Pension Fund had $1.04 billion in hedge fund assets out of a total $31.6 billion, and the New York City Fire Department Pension Fund had $335 million in hedge fund assets out of a total $10.36 billion. Representatives of the police and fire department funds declined to comment on whether their trustees are reviewing their hedge fund investments.

The Teachers' Retirement System of the City of New York and the New York City Board of Education Retirement System don't invest in hedge funds.

Each city pension fund has its own board of trustees. The five funds are part of the $154 billion New York City Retirement Systems.

Among the 11 NYCERS trustees, 10 voted on April 14 to get out of hedge funds.

Trustee Letitia James, the New York City public advocate and the city's second-highest ranking elected official, seconded the resolution. At the meeting, Ms. James criticized what she said were “exorbitant” fees being paid for “high-risk and opaque investments.” Ms. James said she saw “little evidence” that the hedge fund portfolio added overall value via increased returns or decreased risk.

Responsible portfolio

In a statement issued after the meeting, New York City Comptroller Scott Stringer, who is the fiduciary for the five New York City pension funds, said the trustees believe an asset allocation without hedge funds will help NYCERS “construct a responsible portfolio that meets our long-term investment objectives.” The trustees have not yet voted on a revised asset allocation strategy.

The one dissenting vote on hedge fund divestmentcame from Patricia Stryker, recording secretary, Local 237, of the International Brotherhood of Teamsters, representing Gregory Floyd, a NYCERS trustee and president of Local 237. Ms. Stryker said her union believes it would be “premature” for NYCERS to exit hedge funds now. Given NYCERS' strategy of investing for the long term, “we haven't been in hedge funds that long” to make a comprehensive assessment, she said.

As of June 30, NYCERS had hedge investments with Brevan Howard, Brigade Capital Management, Carlson Capital, Caspian Capital, Cantab Capital Partners, D.E. Shaw, Fir Tree Partners, Luxor Capital Group, Perry Capital, Pharo Management, SRS Investment Management, Standard General and Turiya Capital.