NEW YORK (Reuters) - New York City’s largest public pension fund voted on Thursday to unwind all of its hedge fund investments in a sign of the growing dissatisfaction with the asset class in the $4 trillion public pension fund sector.
The board of the New York City Employees Retirement System (NYCERS) voted to “liquidate NYCERS hedge fund investments as soon as practicable in an orderly and prudent manner” and “cease future hedge fund allocation.”
The move by the fund, which had $51.2 billion in assets as of Jan. 31, follows a similar action by the California Public Employees’ Retirement System (Calpers), the nation’s largest public pension fund.
“Hedges have underperformed, costing us millions,” New York City’s Public Advocate Letitia James told board members in prepared remarks. “Let them sell their summer homes and jets, and return those fees to their investors.”
New York city’s public pension system has five separate pension funds with individual governing structures. The system has total assets of around $154 billion, with about $3 billion invested in hedge funds as of Jan. 31. NYCERS’ decision does not affect investments in other funds.
NYCERS had $1.7 billion invested in hedge funds at the end of the second quarter 2015, according to its financial report. That amounted to 2.8 percent of total assets and was the smallest portion of its ‘alternative investments’ portfolio, which included an $8.1 billion allocation to private equity.
The report shows that NYCERS paid nearly $40 million in fees to hedge funds during its 2015 financial year. Its investments included Luxor Capital Group, Brigade Capital Management and Fir Tree Partners. Its hedge fund portfolio returned 3.89 percent over the year, according to its financial report.
“Hedge funds are charging exorbitant fees for high-risk and opaque investments,” said James.
Hedge fund returns have been lackluster for some time with the average fund losing roughly 1 percent last year when the broader stock market was flat, prompting many institutional investors to leave.
The U.S. public pension sector started to heavily invest in hedge funds after the financial crisis in 2008-2009 to diversify assets. A CEM Benchmarking survey of public pensions with a total of $2.4 trillion in assets found that in 2014, 5.2 percent of assets were invested in hedge funds.
Calpers, which had been investing with hedge funds for more than a decade, announced its plans to exit in 2014, saying the investments were too costly and complicated.
Reporting by Edward Krudy, additional reporting by Svea Herbst; Editing by Nick Zieminski