The largest New York City public pension plan voted Thursday to dump all of its hedge fund investments.
The $55 billion New York City Employees’ Retirement System (NYCERS) will liquidate its $1.7 billion hedge fund portfolio “as soon as practicable,” the board of trustees said.
NYCERS had invested in hedge funds “with the belief that they would add value to the performance, both by increasing returns and decreasing risks by providing downside protection,” a trustee member said. “I have seen little evidence of either.”
Instead, hedge funds charged “exorbitant fees for high-risk and opaque investments,” the trustee continued, and managers have “generally underperformed or lagged the markets.”
“They charge these fees and, more often than not, balk at negotiations for investor-favorable terms,” she said.
According to financial reports, NYCERS had 2.8% of its total portfolio invested in hedge funds as of June 30, 2015 and gained 3.89% for the fiscal year. The hedge fund portfolio also returned 6.54% for the trailing three years gross of fees.
Meanwhile, NYCERS paid nearly $40 million in fees during the year to hedge funds managers, including Brevan Howard, DE Shaw, and Perry Capital.
“Hedge funds can be removed from the asset mix [and still] achieve target returns and maintain consistent levels of volatility,” the board said.
In September 2014, the California Public Employees’ Retirement System (CalPERS) also announced it would dump its $4 billion hedge fund portfolio.
“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the [hedge fund] program is no longer warranted,” CIO Ted Eliopoulos said at the time of the announcement.
CalPERS reported it had cut costs by $217 million in the 12 months ending June 2015, largely aided by eliminating the hedge fund portfolio.
Related: ‘Serious Issues’ in NYC Pension Investment Operations & CalPERS CIO: Why We Ditched Hedge Funds