The New York state comptroller’s decision to stick with hedge funds despite their poor returns has cost the Common Retirement Fund $3.8 billion in fees and underperformance, according to a critical report by the Department of Financial Services.
The state comptroller, who invests $181 billion for two systems covering local employees, police and fire personnel, "has over relied on so-called ‘active’ management by outside hedge fund managers," the department said Monday in the 20-page report. "For years the State Comptroller has been frozen in place, letting outside managers rake in millions of dollars in fees regardless of hedge fund performance."
Spokeswoman Jennifer Freeman defended the office of comptroller Thomas DiNapoli, accusing the department of harboring political motives.
"It’s disappointing and shocking that a regulator would issue such an uninformed and unprofessional report," Freeman said in a statement. "Unfortunately, the Department of Financial Services seems more interested in playing political games, so remains unaware of actions taken by what is one of the best managed and best funded public pension funds in the country."
Hedge funds, which charge some of the highest fees in the money-management business, have faced mounting criticism from clients over steep costs and performance that mostly hasn’t kept pace with stock markets since the financial crisis. The California Public Employees’ Retirement System, the largest U.S. pension plan, voted to divest of hedge funds in 2014 because they were too complicated and expensive. On Friday, the investment committee for the Kentucky Retirement Systems voted to exit its $1.5 billion in hedge fund holdings over three years.
Opening Round
The DFS report appears to be the opening round in an broader investigation into the management of New York’s retirement system, the third largest state fund at the end of 2015. Led by Superintendent Maria Vullo, the department said it was considering potential regulations on fees and profit-sharing "as well as pre-approval of contracts that provide for fees or profit sharing in excess of a certain rate."
The topic is of interest to Governor Andrew Cuomo, who oversaw a three-year investigation of the comptroller’s office when he was New York Attorney General. By the end of that probe, former Comptroller Alan Hevesi pleaded guilty to one felony count stemming from a pay-to-play kickback scheme.
Categorized under New York system’s “absolute return strategy,” hedge fund investments lost 4.8 percent in the fiscal year that ended March 31, according to the system’s annual report. The average hedge fund lost 3.8 percent in the same period, according to data compiled by Hedge Fund Research Inc. New York’s hedge fund investments have returned an average of 3.2 percent each year over the past 10 years, compared with 5.7 percent for the total fund.
The DFS’s report said the state had paid almost $1.1 billion in fees to its absolute return managers, a category that includes hedge funds, since 2009. Had the system allocated that money to global equities managers instead, their performance would have netted the fund $2.7 billion more in gains.