The man holding the state pension fund's purse strings said Wednesday the system is likely to pare back its hedge fund investments, especially if fees aren't reduced.
While state Comptroller Thomas DiNapoli said the $178.3 billion New York State Common Retirement Fund, Albany, would continue with so-called alternative investments, including in hedge funds, the combination of high fees and disappointing returns could lead the state to ease off.
"Bottom line: Do I think we're going to get out of hedge funds tomorrow completely? No," Mr. DiNapoli told a Crain's New York breakfast in midtown. "Do I think we're going to do less there? Probably, and we're going to be choosier about those investments that we make, and if we don't get better terms to reduce those fees, it'll really have an impact on our decisions."
Last year, the fund paid nearly $227 million in fees for "absolute-return strategy" funds, mostly hedge funds. It has spent nearly $1 billion on absolute-return fees since 2009 and almost as much on fees for private equity investments, as well as hundreds of millions on fees for those managing real estate, international inequities and other investments, according to state reports. All told, alternative investment management fees since Mr. DiNapoli became comptroller in 2007 have exceeded $2.5 billion.
Mr. DiNapoli said he was looking to get away from the "2 and 20" model and would push hedge funds to offer the state pension fund lower fees. "We're going to be tougher in terms of our negotiations," he said. Hedge funds traditionally charge annual fees of 2% of assets under management and 20% of profits
Mr. DiNapoli said he had been influenced "certainly because of seeing some of the actions that some other funds have taken."
But he did not indicate that he would follow those funds' complete withdrawal, citing the need for diversification of the pension fund. Three percent of the fund's assets are in absolute-return investments, he said, adding that the pension fund's hedge fund portfolio returned 5.9% in fiscal year 2015 and less the following year. He called the current investment climate "challenging."
"Where I think we're headed with the hedge fund space, or the alternatives generally, we will continue to use alternatives as part of our diversification," he said. "We're not going to move away from that."