With Teachers' Still Holding Out, NYC Comptroller Credits Hedge Funds for Pension Success

(July 7, 2011) — With the New York City’s Teachers’ Retirement System (TRS) still holding out, Comptroller John Liu has said hedge funds will assist the city’s schemes in further diversifying their portfolios moving forward following superior investment returns in fiscal year 2011.

“Hedge fund allocation is part of a larger strategy moving forward,” Michael Loughran, a spokesperson at the Office of NYC Comptroller, told aiCIO. “The asset class did not play a role in the fiscal year 2011 returns, but will assist the funds in further diversifying their portfolios.”

According to the Comptroller, the addition of new employees with greater experience in a broader range of asset classes helped to boost pension fund returns. New York City’s police, fire department and municipal employee pensions made their first hedge fund investments earlier this year, all hiring fund of hedge funds Permal Group.

In contrast, however, the $42.3 billion New York City’s Teachers’ Retirement System (TRS) has rejected an allocation to hedge funds. The pension’s investment board — which has been discussing possible changes to the retirement system’s asset mix — had been weighing the possibility of a 3% allocation to the sector, which could have totaled more than $1 billion, HMFWeek reported. However, despite the widespread popularity of the asset class especially following the financial crisis to boost returns, TRS decided not to pursue the investment “based on feedback from various discussions on this topic,” a member of the investment board told the publication.

The city’s Comptroller announced that the New York City Pension Funds recorded investment returns of more than 20% in fiscal year 2011, which ended June 30, marking the first time in 13 years that the funds achieved such a high mark. The preliminary data indicated that the funds’ value at approximately $119 billion as of June 30, 2011, which exceeds the $115 billion pre-2008 crash peak, and the June 30, 2010 value of $97.8 billion.

“While the markets remain volatile, we have vigorously pursued a diversification strategy to enhance our returns while lowering pension costs to the City,” said Comptroller Liu in a statement. “This will protect pensioners and taxpayers alike in the long run. It has been gratifying to work closely with our dedicated Trustees to achieve these results.”

In comparison, public pension-fund assets in the United States rose 3.6% during the first three months of the year, the US Census Bureau reported June 30. In the first quarter, assets of the 100 largest plans grew by $93.9 billion to $2.73 trillion, up from $2.64 trillion on December 31.

Despite the gains in investment returns, New York City’s pension system is still deeply underfunded, which aiCIO investigated in its Spring issue, revealing the tension between the Mayor and Comptroller. Bloomberg’s goal to reform the City’s pensions operation has not been universally applauded. While Liu is responsible for overseeing New York City’s pension management, Bloomberg hired the City’s first chief investment advisor last year and brought on another senior professional to help run the system’s five pension boards. Insiders claim that Bloomberg favors greater attention to risk management and asset allocation and less emphasis on selecting asset managers, which is primarily Liu’s domain.

Click here to read “The End of the 3 and 30”, from the summer issue of aiCIO Magazine, which looks at how hedge funds-of-funds must adapt or perish.