NEW YORK New York City, weighing how best to invest some of its $109 billion pension money in hedge funds, should hire so-called emerging managers, said Public Advocate Bill de Blasio.
Emerging managers include women- and minority-owned hedge funds, which are fairly new and thus typically manage less money than older, more established rivals.
Furthermore, women- or minority-owned hedge funds outperformed their much larger established peers over the last five years, according to a study by Barclays Capital released in June.
"We'd be missing a big opportunity to grow the fund in a tough fiscal climate if we only add emerging managers as an afterthought," De Blasio wrote in a letter to City Comptroller John Liu. The letter was sent in the fall and released to Reuters on Friday.
"If we only stick with the managers traditionally in our Rolodex, small and newer managers who typically generate bigger returns will be left out," De Blasio said.
Liu oversees the city's five pension funds. By early next year, the pension system is expected to make its first direct investments in hedge funds, a spokesman for Liu said on Friday.
"We are beginning to build a direct hedge fund portfolio, which will be approximately 4 percent to 5 percent of each participating NYC pension fund and should ultimately approach $4 billion," the spokesman said.
New York City, like many of cities and states, is finding the pension benefits it granted public workers increasingly unaffordable. The recession has compounded the problem by reducing tax collections.
The city's contribution to its five pension funds has soared to $8.4 billion in the current $67 billion budget from $1.5 billion in the $42 billion 2002 budget when Mayor Michael Bloomberg took office, a mayoral spokesman said.
The women- and minority-owned hedge funds had a cumulative rate of return that topped 82 percent, versus the 51 percent rate produced by funds run by other managers in the five-year period ended March 2011, Barclays found.
The last five years have been exceptionally volatile, and Barclays noted that funds run by women tend to do better in down markets because women managers are more risk-averse.
Three of New York City's pension funds committed last spring to invest $450 million with a hedge fund-of-funds manager, the Permal Group, Liu's spokesman said. A fund of funds takes stakes in other hedge funds to diversify its investors' portfolios.
The pension funds have $6.1 billion invested with women- and minority-owned non-hedge fund firms, the highest total ever.
(Reporting by Joan Gralla; Editing by Kenneth Barry and Dan Grebler)