New York pension funds taken to task by DFS
18 October 2016 New York
Image: Shutterstock
The New York State Common Retirement Fund (CRF), the investment arm of several New York state pension funds, has been accused of running 鈥渕isguided investment scheme鈥� and failing to 鈥渁djust and anticipate potential future losses鈥� in a scathing report by the Department of Financial Services (DFS).
The report, published by DFS superintendent Maria Vullo, singled out the CRF for investing in high-cost, underperforming hedge funds and non-transparent private equity funds since 2008, which comes in stark to other US state pension managers nationwide that have cut or eliminated similar investments.
According to the report, the State of New York comptroller, Thomas DiNapoli, who has sole responsibility for state pension fund asset investment allocation, has 鈥渙ver relied on so-called 鈥榓ctive鈥� management by outside hedge fund managers, who consistently have underperformed low-cost diversified index investments while charging huge fees鈥�.
Vullo said: 鈥淧ension fund managers across the country have cut or eliminated exposure to these overpriced and underperforming investments, while the Office of the New York state comptroller has stood still and spent pension system funds chasing performance that continues to fall far short.鈥�
The report covers fiscal years between 1 April 2008 through to 31 March 2016 and is the first in a series of reports to be released by DFS on the investment activities of the pension systems it regulates.
Specifically, DFS highlighted the CRF鈥檚 鈥渋ncredibly poor hedge fund returns in fiscal years 2009 to 2011鈥�, where the state鈥檚 pension funds suffered a three-year deficit totally $1.3 billion, which increased to $1.5 billion once excess fees were considered.
鈥淩ather than correcting this misguided investment scheme the comptroller put more money鈥�86 percent more by 2016鈥攊nto the worst performing investment allocation,鈥� explained the DSF in the report.
鈥淪till reeling from the system鈥檚 incredibly poor hedge fund returns in fiscal years 2009 to 2011, the comptroller鈥檚 failure to adjust and anticipate potential future losses cost the system another 10 percentage point deficit in fiscal year 2014.鈥�
Referring to excessive fees paid by the state鈥檚 pension fund, the DSF described it as shocking that the CRG had paid $1 billion to hedge funds over the past eight years, considering the underperformance those funds returned.
鈥淗edge funds are the worst of the six asset allocation classes with a 10-year record,鈥� stated DSF.
The New York state comptroller's communications director Jennifer Freeman responded to the allegations, stating: "It's disappointing and shocking that a regulator would issue such an uninformed and unprofessional report. This report was emailed to our office five minutes before it was provided to the press.鈥�
鈥淚f the agency had reached out to our investment professionals, it would have known the aggressive steps that comptroller DiNapoli and CIO Vicki Fuller have taken to reduce hedge fund investments and limit fees, including lowering the hedge fund allocation to 2 percent of assets from 3 percent and paying below average fees.鈥�
2
鈥淚n fact, the fund has not put money into a hedge fund in well over a year. Unfortunately, the Department of Financial Services seems more interested in playing political games, so remains unaware of actions taken by what is one of the best managed and best funded public pension funds in the country. We will provide a full response after a thorough review.鈥�
The report, published by DFS superintendent Maria Vullo, singled out the CRF for investing in high-cost, underperforming hedge funds and non-transparent private equity funds since 2008, which comes in stark to other US state pension managers nationwide that have cut or eliminated similar investments.
According to the report, the State of New York comptroller, Thomas DiNapoli, who has sole responsibility for state pension fund asset investment allocation, has 鈥渙ver relied on so-called 鈥榓ctive鈥� management by outside hedge fund managers, who consistently have underperformed low-cost diversified index investments while charging huge fees鈥�.
Vullo said: 鈥淧ension fund managers across the country have cut or eliminated exposure to these overpriced and underperforming investments, while the Office of the New York state comptroller has stood still and spent pension system funds chasing performance that continues to fall far short.鈥�
The report covers fiscal years between 1 April 2008 through to 31 March 2016 and is the first in a series of reports to be released by DFS on the investment activities of the pension systems it regulates.
Specifically, DFS highlighted the CRF鈥檚 鈥渋ncredibly poor hedge fund returns in fiscal years 2009 to 2011鈥�, where the state鈥檚 pension funds suffered a three-year deficit totally $1.3 billion, which increased to $1.5 billion once excess fees were considered.
鈥淩ather than correcting this misguided investment scheme the comptroller put more money鈥�86 percent more by 2016鈥攊nto the worst performing investment allocation,鈥� explained the DSF in the report.
鈥淪till reeling from the system鈥檚 incredibly poor hedge fund returns in fiscal years 2009 to 2011, the comptroller鈥檚 failure to adjust and anticipate potential future losses cost the system another 10 percentage point deficit in fiscal year 2014.鈥�
Referring to excessive fees paid by the state鈥檚 pension fund, the DSF described it as shocking that the CRG had paid $1 billion to hedge funds over the past eight years, considering the underperformance those funds returned.
鈥淗edge funds are the worst of the six asset allocation classes with a 10-year record,鈥� stated DSF.
The New York state comptroller's communications director Jennifer Freeman responded to the allegations, stating: "It's disappointing and shocking that a regulator would issue such an uninformed and unprofessional report. This report was emailed to our office five minutes before it was provided to the press.鈥�
鈥淚f the agency had reached out to our investment professionals, it would have known the aggressive steps that comptroller DiNapoli and CIO Vicki Fuller have taken to reduce hedge fund investments and limit fees, including lowering the hedge fund allocation to 2 percent of assets from 3 percent and paying below average fees.鈥�
2
鈥淚n fact, the fund has not put money into a hedge fund in well over a year. Unfortunately, the Department of Financial Services seems more interested in playing political games, so remains unaware of actions taken by what is one of the best managed and best funded public pension funds in the country. We will provide a full response after a thorough review.鈥�
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