(March 3, 2011) — In an attempt to further diversity its assets, New York City’s roughly $23 billion Police Pension Fund, with a funding ratio of about 60%, has approved its first hedge fund investment, according to John Liu, the city’s comptroller.

Many industry observers would argue that the fund is unfashionably late to the party, yet to gain further diversification, the investment is better late than never.

“Consistent with the long-term objectives of providing reliable returns, reducing investment volatility, and capitalizing on the changing market landscape, the New York City Comptroller’s Office has recommended, and the Police Pension Board approved, an initial allocation to hedge funds,” New York City Chief Investment Officer Larry Schloss confirmed in a statement. “Subject to satisfactory negotiations, we expect to initiate a hedge fund-of-funds program which is to be followed by a series of direct investments in hedge funds. This strategy builds on Comptroller John C. Liu’s and the Board’s commitment to protecting pensioners and taxpayers.”

In addition to Comptroller Liu, the New York City Police Pension Fund trustees are:

Mayor Michael Bloomberg; New York City Finance Commissioner David Frankel; New York City Police Commissioner Raymond Kelly (Chair); Patrick Lynch, Patrolmen’s Benevolent Association; Michael Palladino, Detectives Endowment Association; Edward D. Mullins, Sergeants Benevolent Association; Thomas Sullivan, Lieutenants Benevolent Association; and, Roy T. Richter, Captains Endowment Association.

The New York pension’s much delayed move into hedge funds follows the decision by the State of Wisconsin Investment Board, which finally made its first-ever allocation to hedge funds earlier this month. The fund is allocating $100 million to Capula Investment Management LLP. The allocation refects the increasing attractiveness of hedge funds among institutional investors, supported by a recent report from Preqin that revealed institutional investors now constitute the largest piece of the hedge fund capital pie.

In 2010, the Wisconsin fund decided to put about 2%, or $1.4 billion, of its $73.5 billion core fund with hedge funds in the next months via direct investments. It plans to select between 15 and 20 managers.

The New York City pension’s move into fund-of-funds stands in stark contrast to the $48.7 billion Massachusetts Pension Reserves Investment Management (MassPRIM), which decided to shift from a fully fund-of-funds investment strategy to incorporating more direct hedge funds.

“Tim Cahill, our previous treasurer, felt that having a fund-of-funds approach would achieve better diversification,” MassPRIM spokesman Barry Nolan confirmed with aiCIO. “But there’s also the argument that with a fund-of-funds strategy, you can reach a point of diversifying too broadly, leading to diminishing returns,” he said, noting the while Cahill, who suffered a tarnished reputation over accusations of political influence, achieved solid returns as treasurer, concern centered on the middle layer of management that his fund-to-funds approach created

MassPRIM’s Executive Director Michael Trotsky, who succeeds Michael Travaglini, has jumpstarted the push toward relying less heavily on Cahill’s fund-of-funds strategy. “Trotsky is a former hedge fund manager with real world experience, and in this highly competitive atmosphere he believes it’s worthwhile pursuing a direct investment strategy because there are $30 million in fees out there that could be turned into returns,” Nolan said, explaining the fund’s endeavor to achieve the right balance between a fund-of-funds and direct approach. The idea is that by eliminating an additional layer of management and management fees and utilizing Trotsky’s experience, the fund will be able to maintain the level of returns as well as its safety of security, according to Nolan.