“Let Them Sell Their Summer Homes” – NYC’s Largest Public Pension to Ditch Hedge Funds

Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers.

Bowden pointed out that private equity is unique among the investment advisers the SEC supervises. The general partners’ control of portfolio companies gives them access to their cash flows, which the GPs can divert into their own pockets in numerous ways.

– From the post: SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior

Is this the beginning of the end for the damaging and often predatory relationship between public pensions and “alternative asset managers” such as hedge funds and private equity? It should be.

Here’s what I had to say on the matter in January’s post, Additional Details Emerge on How Hedge Funds and Private Equity Firms Loot Public Pensions:

One of the most pernicious financial schemes of the post crisis era relates to a practice most Americans are entirely in the dark about, but may end up harming retirement plans down the line. I refer to the pervasive, incestuous and shady relationship between public pension fund managers, politicians and alternative asset firms (hedge funds and private equity).

Indeed, in the “new normal” of rigged financial markets, much of the investment industry no longer cares all that much about performance. The name of the game is to simply collect as massive an asset under management pile as possible and earn tremendous wealth by collecting fees risk-free. The enormous amount of “dumb money” residing at public pension funds provides the perfect mark, and pension managers as well as corrupt politicians and their appointed bureaucrats appear more than willing to comply.

The good news is some of these public pensions have finally discovered their status as glorified fee-generating milk cows. Reuters reports:

NEW YORK (Reuters) – New York City’s largest public pension 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 move by the fund, which had $51.2 billion in assets as of Jan. 31, follows a similar actions by the California Public Employees’ Retirement System (Calpers), the nation’s largest public pension fund, and public pensions in Illinois.

“Hedges have underperformed, costing us millions,” New York City’s Public Advocate Letitia James told board members in prepared remarks. “Let them sell their summer homes and jets, and return those fees to their investors.”

New York city’s public pension system has five separate pension funds with individual governing structures. The system has total assets of $154 billion, with about $3 billion invested in hedge funds as of Jan. 31. 

NYCERS had $1.7 billion invested in hedge funds at the end of the second quarter 2015, according to its financial report. That amounted to 2.8 percent of total assets and was the smallest portion of its ‘alternative investments’ portfolio, which included $8.1 billion in private equity.

“Hedge funds are charging exorbitant fees for high-risk and opaque investments,” said James.

Public pensions started to invest heavily in hedge funds after the financial crisis in 2008-2009 to diversify their assets. A CEM Benchmarking survey of public pensions with a total of $2.4 trillion in assets found 5.2 percent of assets were invested in hedge funds in 2014, compared to 1 percent a decade earlier.

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