Public pension funds feeling the heat in hedge fund furor

Pressure to exit hedge fund portfolios — as the $51.2 billion New York City Employees' Retirement System resolved to do last month — is almost exclusively a U.S. public pension plan phenomenon, sources said.

One conclusion that can be drawn from the attention generated by NYCERS' announcement and a similar decision 18 months earlier by trustees of the $293.6 billion California Public Employees' Retirement System, Sacramento, is that “this is a public pension plan problem, not an industry problem,” said Jack Inglis, CEO of the Alternative Investment Management Association, London, a hedge fund industry group.

Investment consultants said their corporate pension plan, endowment, foundation, insurance company and health-care clients rarely are subject to external lobbying about hedge funds and don't share the same level of frustration with fees, performance and transparency that public pension plans seem to.

“If they've had the benefit of good equity returns, many corporate pension funds are locking in their gains by investing in lower-risk investments such as hedge funds, private equity and other alternative strategies,” said George Hasiotis, managing director and a hedge fund portfolio construction specialist at consultant Cambridge Associates LLC, Boston.

American labor unions such as the AFL-CIO and its affiliates, including the American Federation of Teachers and the American Federation of State, County and Municipal Employees, have been critical of hedge fund investments in public pension funds like NYCERS and the $71.1 billion New Jersey Pension Fund, Trenton.

In a statement on its website, AFSCME-AFL-CIO District Council 37, New York, said it had been urging NYCERS trustees for “months” to redeem the fund's $1.4 billion hedge fund portfolio.

Henry Garrido, a NYCERS trustee and executive director of Council 37, introduced the resolution to divest because “the (hedge) funds charge enormous fees for high-risk investments yet yield tepid results,” the statement said.

“As stewards of the retirement security of public employees of modest means, our role is not to facilitate luxury purchases for high-rolling hedge fund managers,” Mr. Garrido said in the statement, which was issued on April 14, the day NYCERS made its decision.

The New Jersey Pension Coalition — a group of seven unions, including the New Jersey State AFL-CIO and AFSME Council 1 — presented a critique of the performance and fees of alternative investments, including hedge funds, in the state's pension fund to the State Investment Council during a March 23 meeting. The council serves as an adviser to the state's Division of Investment, which has discretionary management of the pension fund.

“It's outrageous that Wall Street millionaires are becoming Wall Street billionaires at the expense of middle-class workers and retirees. New Jersey's retired public workers receive a $26,000 per year pension on average, so the only people getting rich off our pension system are the managers reaping obscene fees and bonuses,” said Charles Wowkanech, president of the New Jersey State AFL-CIO, in a statement in support of the coalition report.

The New Jersey Investment Division characterized the union report as inaccurate and asked that partisan groups not “prioritize politics over what is best” for public pension plans, Christopher Santarelli, a Treasury Department spokesman, said in a Pensions & Investments' story last month.

A report issued in November by the American Federation of Teachers, Washington, analyzed the portfolios of 11 public pension plans — including NYCERS and the New Jersey fund — and concluded that because of high fees and poor performance of hedge fund investments, each portfolio overall would have performed better without hedge funds.

Daniel Pedrotty, the AFT's director of pensions and capital structure, noted it was significant that two of the 11 funds analyzed completely cut or reduced their hedge fund investment portfolios.

The $15.2 billion Illinois State Board of Investment, Chicago, reduced its hedge fund allocation to 3% from 10% in February for performance reasons.Despite the political overtones in labor union criticism of hedge funds and hedge fund managers, Mr. Pedrotty stressed the AFT is “only working for “the benefit of beneficiaries and members and to help trustees.”

“We are making a fiduciary case to help trustees be sure that hedge funds are the right choice for the plan they oversee,” Mr. Pendrotty added.

Issues raised by labor unions about hedge funds are “issues that the whole country is dealing with, the 1% against the 99%,” said Raymond C. Nolte, co-managing partner, chief investment officer and portfolio manager of hedge funds-of-funds manager SkyBridge Capital II LLC, New York.

“Public plans with unions are saying that the plans don't need to invest in hedge funds to benefit the evil empire. I think a lot of this is being done for political reasons and to appease constituents,” Mr. Nolte added.