Here’s what U.S. state and city pension funds are getting this year for the hundreds of millions of dollars in fees they’re forking over to hedge funds: almost nothing.
The investment pools gained 0.4 percent through November, putting them on pace for the worst year since 2011, according to data compiled by Bloomberg. The industry’s struggle was underscored over the past two months as BlackRock Inc., Fortress Investment Group and Bain Capital closed hedge funds after running up losses.
The low returns are dealing a setback to governments that boosted exposure to hedge funds, seeking windfalls to help close a $1.4 trillion shortfall that’s facing public-employee retirement systems nationwide. The investment funds have underperformed stocks since 2008 as share prices rallied and volatility whipsawed global financial markets.
“The bull market of the last six years allowed public pension plans to become poor consumers,” said South Carolina Treasurer Curtis Loftis, who has criticized the fees his state has paid firms including hedge funds. “The plans viewed hedge funds as an ‘elite investment’ and therefore neglected to perform strenuous and ongoing due diligence.”
Public pensions count on investment returns of more than 7 percent a year, so anything less puts pressure on governments to set aside more to ensure they can cover all the benefits promised to employees. The retirement systems boosted their stakes in hedge funds to $184 billion this year from $94 billion in 2011, according to Preqin, which tracks the industry.
With their investments faltering, funds with more than $16 billion of assets have announced plans to shut down this year, including those run by some of Wall Street’s most well-known firms, according to data compiled by Bloomberg. BlackRock decided to close its Global Ascent hedge fund following losses that triggered withdrawals by investors including the Arizona Public Safety Personnel Retirement System, Fort Worth Employees’ Retirement Fund and the Maryland State Retirement and Pension System.
The Arizona fund doesn’t discuss investment decisions, said Christian Palmer, its spokesman. Michael Golden, a spokesman for the Maryland system, and Mary Kay Glass, a spokeswoman for the Fort Worth system, declined to comment.
Averting Bigger Losses
The hedge fund investments have sheltered some retirement plans from steeper losses during the swings in stock and bond prices this year.
New York City’s civil employees pension, with $52 billion of assets, saw its hedge funds lose 0.7 percent through September, which was less than the 2.26 percent loss for its entire portfolio. For New Jersey, hedge funds posted a 1.7 percent gain during the first nine months of the year, limiting the pension’s losses, though they’ve posted about half the returns of its equity investments over the past five years.