NYCERS to pull money from hedge funds

New York City's pension for civil employees had decided to pull out its $1.5 billion investment in hedge funds and shift the money to other assets, due to the loosely regulated investment pool's unsatisfactory performance.

Yesterday's move by the trustees of the $51 billion Employees Retirement System, known as NYCERS, might trigger similar sentiment at other public pensions to pull their money from the investment vehicles, that had failed to perform. In September 2014, California's Public Employees' Retirement System, the largest US pension, divested its $4 billion portfolio over its high cost and its size that was too small to affect overall returns.

The pension's investments in hedge funds, including with DE Shaw and Brevan Howard, delivered a return or 3.9 per cent after paying fees totaling $40 million in the fiscal year ended 30 June 2015. That fell much short of the pension's 7 per cent targeted annual overall return.

NYCERS invested in hedge funds ''with the belief that these would add value to the performance – both by increased returns and decreasing risk by providing downside protection,'' New York City public advocate Letitia James said in a statement. ''I have seen little evidence of either.''

"Hedges have underperformed, costing us millions," James told board members in prepared remarks. "Let them sell their summer homes and jets, and return those fees to their investors."

Hedge fund returns had been lacklustre for some time, with the average fund losing 1 per cent last year amid a flat stock market, prompting institutional investors' exit.

According to research firm eVestment, investors overall had pulled $19.8 billion from hedge funds in January, marking the biggest monthly outflow since 2009.

Pension consultant Callan Associates conducted a nine-month study and determined that the pension fund could pull its money from hedge funds with little or no negative impact on returns.