New York City pension plan cuts ties to hedge funds

The New York City Employees Retirement System (NYCERS) board of trustees in April voted to liquidate all of its investments in hedge funds. In doing so, NYCERS became the second large public pension in the US to severe its ties to hedge funds.

NYCERS is the largest of the city’s five public pension funds with more than $51 billion in assets.

The board of trustees made its decision because hedge fund investments have performed poorly and are too expensive.

Hedge fund investments are “lousy,” said NYCERS board of trustees member Henry Garrido to New York magazine.

Garrido’s made his assessment after reading a report by the city’s comptroller.

According to the report, the fees charged by firms that manage alternative investments–investments in private equity companies, real estate, and hedge funds–cost the the city’s five public pension funds $2.6 billion over ten years.

Last year, hedge fund performance was especially troubling.

NYCERS’ hedge fund investments had a rate of return of -1.88 percent, a rate of return below the S&P index and the traditional bond market.

Despite the hedge funds’ lackluster performance, they still collected their 2 percent management fees on $1.5 billion worth of assets that they managed for NYCERS.

“Hedges have underperformed, costing us millions,” said Letitia James,  New York City’s public advocate. “Let them sell their summer homes and jets, and return those fees to their investors.”

NYCERS is the second large public pension fund that decided to stop investing in hedge funds. The California Public Employees Retirement System (CalPERS) did so in 2014.

CalPERS Chief Investment Officer Ted Eliopoulus said that the cost, complexity, and the inability to scale hedge fund investments to a size appropriate for CalPERS were the reasons for CalPERS’ decision.

Bloomberg reported that in fiscal year 2014 before the market took the downturn that characterized its performance in 2015, CalPERS paid $135 million in fees for “hedge fund investments that earned 7.1 percent, contributing 0.4 percent to its total return (on investment).”

The decision by NYCERS was applauded by Hedge Clippers, an activist group that has been waging a campaign against public investment in hedge funds.

Prior to the NYCERS decision, Hedge Clippers had spent months lobbying for the pension fund to cut its ties to hedge funds.

Hedge Clippers is urging other public institutions to do the same because hedge funds investments often are at odds with the public interest.

One of its issue papers, “Endangered Endowments: How Hedge Funds Are Bankrupting Higher Education,” finds that hedge fund managers hold a disproportionate number of seats on boards that oversee university endowment funds and use their positions to steer investments to companies they own or to which they have ties.

“Hedge funds collected an estimated $2.5 billion in fees from university endowments in 2015 alone, even though 2015 was reportedly the worst year for hedge fund performance since the financial crisis (of 2008),” reads the issue paper.

According to the paper, “many universities are cash-strapped because they have prioritized paying high fees to hedge fund managers while asking students, faculty, and staff to make up the difference.”

Hedge Clippers is also highly critical of hedge funds role in the current crisis now gripping Puerto Rico.

The unemployment rate in Puerto Rico has climbed to 12.5 percent, and the cash-strapped government has had to cut or eliminate health care, education, and social services.

The Puerto Rican government has asked Congress to grant it permission to work out a deal with its creditors in order to take the pressure off its suffering citizens.

But hedge funds, which swooped in to scoop up cheap Puerto Rican debt, have successfully lobbied Congress to prevent legislation that would enable Puerto Rico to make a deal with creditors.

Hedge Clippers started off as a project of the American Federation of Teachers, whivh grew tired of the role that hedge funds were playing in the effort to privatize public education.

According to a report from the American Prospect, hedge fund owners bankrolled a number of local school board elections in order to stack school boards with proponents of charter schools.

But since its inception, Hedge Clippers has expanded into a broad coalition that includes labor, community, environmental, social justice groups that are outraged by the corruption spawned by the influence of hedge funds over public institutions.

“The Hedge Clippers are working to expose the mechanisms hedge funds and billionaires use to influence government and politics in order to expand their wealth, influence and power,” states a description of the group on its website. “We’re exposing the collateral damage billionaire-driven politics inflicts on our communities, our climate, our economy and our democracy.  We’re calling out the politicians that do the dirty work billionaires demand, and we’re calling on all Americans to stand up for a government and an economy that works for all of us, not just the wealthy and well-connected.”