The New York State Department of Financial Services issued a report Monday criticizing state Comptroller Thomas P. DiNapoli for his use of hedge funds for the $181 billion New York State Common Retirement Fund, Albany, for which he is sole trustee.
The department's report accused Mr. DiNapoli of paying excessive fees to hedge fund managers for poor performance for the fiscal years ended March 31, 2009, through March 31, 2016. “Under the comptroller's watch, the state pension system has spent large amounts of pension system funds chasing returns and performance that has fallen far short for years,” the report said.
Jennifer Freeman, a spokeswoman for Mr. DiNapoli, said in an e-mail that the report was “uninformed and unprofessional,” adding that department “seems more interested in playing political games.”
The department, which supervises the state's public retirement systems, contended the pension fund paid “over $1 billion in excess fees to hedge fund managers who underperformed to the tune of $2.8 billion,” the report said.
“Given the $3.8 billion hole the comptroller's hedge gamble already has dug for the state pension system, taking away the checkbook may be the only way to safeguard the pensions of state employees and the pocketbooks of taxpayers on the hook for system deficits,” Maria T. Vullo, the superintendent of the department of financial services, said in a news release Monday about the report.
“If the agency had reached out to our investment professionals, it would have known the aggressive steps that Comptroller DiNapoli and CIO Vicki Fuller have taken to reduce hedge fund investments and limit fees,” Ms. Freeman wrote, adding that the report was mailed to the comptroller's office five minutes before being released to the public. “We will provide a full response after a thorough review.”
Hedge funds, classified as absolute-return strategies, accounted for about 3.5%, or $6.25 billion, of the pension fund's $178.64 billion in assets for the fiscal year ended March 31, the pension fund's annual report said. It also has about $750 million in pending hedge fund redemptions.
The pension fund reduced its hedge fund target allocation to 2% of total assets from 3% in June while “paying below average fees,” Ms. Freeman wrote. “In fact, the fund has not put (new) money into a hedge fund in well over a year.”
To illustrate its case against hedge funds, the department of financial services compared hedge fund returns vs. global equity returns. However, the pension fund's hedge fund portfolio contains more than equity-related hedge fund investments.
The asset breakdown as of June 30 features the following broad categories: 25.1% equity long/short, 24.5% relative value, 21.2% directional, 17% event-driven, 6.3% equity long-biased, 3.3% funds of funds and 2.6% other.
The hedge fund portfolio “consists of roughly 26 core investments across strategies including hedged equity, credit, global macro, managed futures, distressed debt and emerging markets,” said the pension fund's annual report for the fiscal year ended March 31.
“The portfolio seeks diversification through a multimanager and multistrategy approach, typically investing in vehicles which generate uncorrelated returns and those which can lower the overall risk and volatility of the fund's portfolio,” the annual report said.
While the pension fund's total return on investment was 0.19% for the fiscal year ended June 30, the return for absolute-return strategies was -4.78%. However, the absolute-return strategy performance was better than the HFRX Global Hedge Fund index, the pension fund's benchmark, which was -8.19% for the same period.
The absolute-return strategies returned an annualized 3.46% for three years ended March 31; five years, 3.69%; and 10 years, 3.23%, each exceeding the global hedge fund index for those periods.
Annualized returns for the total pension fund during those corresponding periods were 6.66%, 7.25% and 5.69%, respectively.
In May, Mr. DiNapoli said the pension fund would “probably” reduce its exposure to hedge funds but wouldn't drop them completely. “We're going to be choosier about those investments that we make,” he told the audience at a forum sponsored by Crain's New York Business, a sister publication of Pensions & Investments.
”If we don't get better terms to reduce those fees, it will have a real impact on our decision,” he added. “We're going to be tougher in terms of our negotiations.”
The full report can be found on the Department of Financial Services' website.
