New York City’s Largest Public Pension Exits Hedge Fund Investments

New York City’s Largest Public Pension Ditches Hedge Funds Amid Poor Performance and High Fees

In a bold move, the New York City Employees Retirement System (NYCERS) has decided to exit all hedge fund investments, signaling a growing trend among public pensions to move away from these often secretive and costly portfolios.

With assets totaling $51.2 billion as of Jan. 31, NYCERS made the decision to divest from blue chip firms like Brevan Howard and D.E. Shaw after consultants advised that they could achieve their targeted investment returns with less risky funds.

This decision follows similar actions taken by other major public pensions, including the California Public Employees’ Retirement System (Calpers) and pensions in Illinois. The move was motivated by the underperformance of hedge funds, which have been costing NYCERS millions of dollars.

New York City’s Public Advocate Letitia James expressed her frustration with hedge funds, stating, “Let them sell their summer homes and jets, and return those fees to their investors.” The move is a significant blow to the $3 trillion hedge fund industry, as pensions are seen as stable, long-term investors.

Hedge fund returns have been lackluster, with the average fund losing about 1 percent last year while the stock market remained flat. This has led institutional investors to withdraw their investments, with a total of $19.8 billion pulled from hedge funds in January alone, the largest monthly outflow since 2009.

Some of the funds in which NYCERS had invested performed even worse, with Luxor Capital Group losing an average of 18.3 percent per year over the last two years. The decision to exit hedge funds will allow NYCERS to construct a more responsible portfolio that aligns with its long-term investment objectives.

Comptroller Scott Stringer, a trustee of NYCERS, emphasized the need to eliminate hedge funds, citing their exorbitant fees for high-risk and opaque investments. The move reflects a broader trend among public pensions, which began heavily investing in hedge funds after the financial crisis in 2008-2009 to diversify their assets.

With public pensions reevaluating their investment strategies, the future of the hedge fund industry remains uncertain. As more pension funds opt to exit these investments, hedge funds may need to reassess their strategies to attract and retain investors in an increasingly competitive market.