(Recasts; adds comment from Comptroller DiNapoli's spokeswoman,
context, details from report)
By Suzanne Barlyn and Svea Herbst-Bayliss
Oct 17 Bets on expensive but poorly performing
hedge funds have cost pensioners in New York $3.8 billion in the
last eight years, according to a report published by the state's
financial regulator on Monday.
"Hedge fund managers continue to reap hundreds of millions
of dollars in fees, regardless of their performance, which is a
rip-off at the expense of pensioners," Maria Vullo,
superintendent of the New York State Department of Financial
Services, said in a statement.
The New York State Common Retirement Fund, which oversees
$178 billion in assets and is the third-largest U.S. pension
fund, paid $1 billion in fees to hedge fund managers over the
last eight years, the regulator said in the report. The funds
underperformed to the tune of $2.8 billion, said the regulator,
which oversees banks and insurance companies in the state.
Hedge funds, according to the 20-page report, are the "worst
of the six asset allocation classes" in which the pension fund
invests. Many hedge funds are now making the same types of bets,
and the state's Common Retirement Fund arrived late to an asset
class where a small number of investors made eye-popping returns
years ago, the report said.
The regulator is considering regulatory reforms for the
pension fund's hedge fund investments as well as reforms to
address a lack of transparency in private equity investments.
"Given the $3.8 billion hole the comptroller's hedge fund
gamble already has dug for the state pension system, taking away
the checkbook may be the only way to safeguard the pensions of
state employees, and the pocketbooks of taxpayers on the hook
for system deficits," Vullo said.
The highly critical report comes at a time pension funds
from California to Rhode Island have decided to pull all or at
least some of their money out of hedge funds because of
lackluster returns and high fees.
Hedge funds that the New York State Common Retirement Fund
has invested in lost nearly 5 percent in fiscal 2016, according
to the report. The state made investments with some of the
industry's most highly respected hedge funds, including Nelson
Peltz' Trian Fund Management, John Paulson's Paulson & Co,
Daniel Och's OZ Advisors and Ray Dalio's Bridgewater Associates.
The regulator, in the report, blames New York State
Comptroller Thomas DiNapoli, the sole trustee overseeing the
state pension fund, for "letting outside managers rake in
millions of dollars in fees regardless of hedge fund
performance, and tolerating large private equity fees and
expenses without obtaining necessary transparency."
DiNapoli's spokeswoman, Jennifer Freeman, responded in a
statement that "It's disappointing and shocking that a regulator
would issue such an uninformed and unprofessional report." The
report was emailed to the comptroller's office five minutes
before it was provided to the press, Freeman said.
The comptroller's office has taken "aggressive steps" to
reduce hedge fund investments and limit fees, Freeman said.
Those measures include reducing the pension fund's hedge fund
allocation to 2 percent of assets from 3 percent and not putting
money into a hedge fund for more than a year, Freeman said.
The Common Retirement Fund is the investment arm of the New
York State and Local Employees' Retirement System and the New
York State and Local Police and Fire Retirement System.
New York City's largest public pension fund, the New York
City Employees Retirement System, is exiting all hedge fund
investments in the latest sign that the $4 trillion public
pension sector is losing patience with these often secretive
portfolios at a time of poor performance and high fees.
The Department of Financial Services report is the first in
a series to be released about the investment activities of
pension systems it has authority to audit. The department also
has audit authority over five other pension systems, including
the New York State Teachers Retirement System and the New York
City Employees Retirement System.
(Reporting by Suzanne Barlyn and Svea Herbst-Bayliss; Editing
by Nick Zieminski and Steve Orlofsky)