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New York City Officials Heroically Realize That Hedge Funds Charge Fees

They also want to show their acumen by reminding New Yorkers that the East River is wet.

The pension fund that New York City manages on behalf of municipal employees is enormous. Unfortunately it is also controlled by an often goofy junta of local politicians.


That leads to a lot of consternation and hand-wringing over whether or not things are being done intelligently or politically. And it can also lead to amazing moments of kabuki theater when the answer is "both."

For instance, this:

New York City Employees’ Retirement System, which manages about $60 billion on behalf of 300,000 municipal employees, has about four percent of its investments allocated to hedge funds.

Which is totally fine because those funds have been pretty awesome. Right, Crain's New York Business from 2014?

The city's $3.4 billion hedge-fund portfolio returned 6.8% in the year ended June 30 [2014]. That's way below the 24% returned by the S&P 500 in the same 12 months and the 16% returned by a Vanguard balanced index fund composed of 60% stocks and 40% bonds. It even falls short of an 8.6% benchmark for hedge funds set by the city.

Wow. That kind of sucks. Especially considering that the city paid $112 million in fees that year for the opportunity to watch DE Shaw get its ass kicked by an index fund. And when you factor in that hedge funds underperformed the city's super-aggressive target of 4% for 2015, it becomes obvious that cheap political points can be scored.

New York City’s public employee pension fund voted Thursday to pull its money from hedge funds.


Representatives of the five borough presidents, the comptroller, and the public advocate all voted for the hedge-fund exit.

So everyone but the rather unpopular mayor gets a little taste, and top city officials can point to good old logic in explaining their easy vote...sweet.

“They have severely under performed,” said Letitia James, the city’s public advocate and a trustee of the pension fund…“They believe they can do no wrong while losing money,” James added.

Oh, so close! But also so wrong.

Hedge funds didn't lose the pension fund money. In fact they made money. That's what a positive return means. Now if the sum total of that return was less than the 2 and 20 that the city was paying to get that money, well that's on James and her colleagues.

If we're being fair, it's the people ultimately responsible for the city pension funds who are responsible for any net loss in pension money. Hedge funds charge exorbitant fees, that's what makes them a hedge fund. For city officials to suddenly decide that hedge funds are bad for their fee structure is tantamount to issuing a decree that 99 cent pizza tastes bad.

We know.

And to top it off, the people who heroically voted to remove hedge funds from management of city money are all entering at least their third year in office, meaning that they've been watching this for awhile and are just now deciding to do something about it. The pension fund has been invested with hedge funds since 2011.

It's disingenuous to pretend that hedge fund fees are objectively fair and good for the economy, but it's equally shady to claim political victory for a decision that could have been made years ago if the people being negatively affected weren't some of the largest political donors in New York City politics. It's a lot harder to whack Wall Street on the nose when Wall Street is literally blocks away.

But that's too complicated, so let's just blame the hedge funds for being terrible and losing all that money. Because if we don't stop there, James and her gang might have to just fire themselves.

NYC employees’ pension yanks money from hedge funds [NY Post]



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