Friday, April 15, 2016

Let Them Sell Their Summer Homes?

Edward Krudy of Reuters reports, 'Let them sell their summer homes': NYC pension dumps hedge funds:
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 board of the New York City Employees Retirement System (NYCERS) voted to leave blue chip firms such as Brevan Howard and D.E. Shaw after their consultants said they can reach their targeted investment returns with less risky funds.

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."

The move is a blow to the $3 trillion hedge fund industry where managers like to have pensions as investors because they leave their money in for longer than individuals, sending a signal of stability to other investors.

Hedge fund returns have been lackluster for some time. The average fund lost about 1 percent last year when the stock market was flat, prompting institutional investors to leave.

Research firm eVestment said investors overall pulled $19.8 billion from hedge funds in January, marking the biggest monthly outflow since 2009.

Performance at some of the funds with which New York City invested was far worse. Luxor Capital Group, a long-time favorite with many pensions, lost an average 18.3 percent a year for the last two years.

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.

Unaudited data from the city Comptroller's office showed NYCERS' hedge fund exposure was $1.4 billion as of Jan. 31.

Comptroller Scott Stringer, a trustee, said eliminating hedge funds would a help NYCERS construct a "responsible portfolio that meets our long-term investment objectives".

NYCERS paid nearly $40 million in fees to hedge funds during its 2015 financial year, while its hedge fund portfolio returned 3.89 percent over the year, according to its financial report.

"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.
Martin Braun of Bloomberg also reports, NYC Pension Votes to Scrap $1.5 Billion Hedge Fund Portfolio:
New York City’s pension for civil employees voted to exit its $1.5 billion portfolio of hedge funds and shift the money to other assets, deciding that the loosely regulated investment pools didn’t perform well enough to justify the high fees.

The action Thursday by the trustees of the $51 billion Employees Retirement System, known as NYCERS, may signal a growing willingness among public pensions to pull their money from the investment vehicles, whose highly paid managers have become a political lightning rod and have frequently failed to outperform. In September 2014, California’s Public Employees’ Retirement System, the largest U.S. pension, divested its $4 billion portfolio saying it cost too much and was too small to affect its overall returns.

NYCERS invested with hedge funds “with the belief that these would add value to the performance – both by increased returns and decreasing risk by providing downside protection,” New York City Public Advocate Tish James said in a statement. “I have seen little evidence of either.”

The New York fund’s decision will remove assets from firms including D.E. Shaw & Co., Brevan Howard Asset Management, and Perry Capital. Last year, NYCERS’s hedge fund portfolio lost 1.88 percent, lagging both the Standard & Poor’s 500 Index and the Barclays U.S. Aggregate Bond Index. Three-year returns were 2.83 percent.

Todd Fogarty, a spokesman for D.E. Shaw, Max Hilton, a spokesman for Brevan Howard and Mike Geller, a spokesman for Perry Capital, didn’t immediately return e-mails and phone calls seeking comment.


Hedge funds eked out returns of about 0.6 percent in 2015, when the S&P 500 slipped 0.7 percent, according to data compiled by Bloomberg. That was the first time the funds had outperformed the index since 2008 as share prices rallied.

NYCERS’s hedge fund investments were subject to intense political scrutiny. Last year, New York Mayor Bill de Blasio referred to funds that bought Puerto Rico’s bonds as ”predators" because they demanded cuts in spending and services to ensure they’re paid in full. Two of NYCERS hedge fund managers held some of Puerto Rico’s $70 billion debt. Hedge fund managers have also come under fire for supporting charter schools, which are privately run but funded with taxpayer money.

Hedge funds still manage money for New York City’s pensions for firefighters and police officers. The city’s teachers’ and education administrators don’t invest with hedge funds.
Reading these articles just reinforces my thinking that it's a requiem for hedge funds in the sense that institutional investors are increasingly frustrated of paying big fees for lousy performance which tracks or underperforms stocks (it's all beta, where's the alpha??).

I've long argued that U.S. public pensions should have followed CalPERS and nuked their hedge fund programs. They have no business whatsoever investing in hedge funds as they lack the internal expertise to understand the risks of these investments and end up listening to their useless investment consultants that shove them in the hottest brand name hedge funds they should be avoiding.

How many U.S. public pensions invested with Bill Ackman's Pershing Square at the wrong time and are now stuck praying shares of Valeant Pharmaceuticals (VRX) are somehow going to magically recover to hit new record highs (keep dreaming, if lucky shares will bounce from these levels but the downtrend is far from over. The only good news for Valeant is it's everyone's favorite whipping boy and Bill Miller thinks it can double from these levels. Others think it's going to zero.).

And it's not just Pershing Square that's experiencing difficulties. Lone Pine Capital's Lone Cypress fund lost 8 percent during the first quarter as bets on Valeant Pharmaceuticals and Energy Transfer/Williams Companies tumbled. A few well-known activist hedge funds got clobbered investing in SandRidge Energy. Extreme volatility in Q1 hit premiere hedge funds like Citadel, Millennium, Blackstone's Senfina. Even Ray Dalio's Pure Alpha fund is down almost 7% so far this year, which goes to show you how tough it is out there.

In fact, in early April, Zero Hedge published a list of the best and worst hedge funds so far this year noting "the bulk of the marquee names continue to substantially underperfom the broader market, with Tiger, Pershing Square, Glenview and Trian standing out" (click on image):


Many institutional investors are worried about the bonfire of the hedge funds. If these titans of finance are unable to cope with ultra low rates for years or the new negative normal, how are delusional U.S. public pensions, many of which are already doomed, going to deliver on their bogey of 6%, 7% or 8%?

Almost five years ago, I warned "what if 8% turns out to be 0%?" but nobody was paying attention, lapping up the nonsense Wall Street was feeding them on a big bad bond meltdown (I'm still waiting for it to happen).

Nowadays, everyone is accustomed to ZIRP and NIRP but pension fund fiduciaries should think long and hard of what this means for their alternative investments. If you're paying 2 & 20 in a deflationary world to any hedge fund or even private equity fund, you're nuts! Period.

I've long argued that hedge fund fees need to come down significantly and I openly questioned why pension funds and sovereign wealth funds pay management fees to a hedge fund or private equity fund managing multi-billions.

It's one thing to give a startup hedge fund a management fee to get up and running but once they are performing well and gathering billions, why keep paying them any management fee? Let them live and die by their performance alone (Do the math: If Bridgewater manages roughly $150 billion and collects a 2% or even 1.5% management fee no matter how well it performs, that is a huge chunk of change for radical transparency nonsense!).

"But everybody is invested with Bridgewater, it's a no-brainer!" Really? I think a lot of pension fund managers need to start grilling their hedge fund managers instead of falling in love with them and regretting it later on. If you're paying huge fees to a brand name hedge fund which is down 6%,8%,10%  or more in one quarter and you're not sure why, you're in big trouble.

What else? I also think it's high time to start thinking outside the box and maybe start investing with smaller hedge funds that have much better alignment of interests. Earlier this week, we learned former Paulson & Co. partner Samantha Greenberg received a $130 million commitment in seed money from the alternative investment manager Ramius LLC for her new hedge fund, Margate Capital. I don't know her but she obviously has the pedigree and it's worth tracking her fund.

Sure, investing in small hedge funds carries its own risks and isn't really scalable but I believe the time is right to put in place a program that seeds or invests in some startup hedge funds. Don't blindly jump on the big brand name funds, a lot of them are nothing more than glorified asset gatherers charging alpha fees for leveraged beta.

Then there's the perfect hedge fund predator, Steve Cohen. He just formed a firm called Stamford Harbor Capital that employs top executives from his family office, and which plans to run private funds that will initially invest in illiquid and nonpublic securities but also in other more liquid instruments (see clip below). Cohen will be back managing outside money for this new fund in a couple of years (I guarantee it, why else did he set up this new fund which will be managed by top lieutenants from his family office?).

Also, New York City's largest public pension fund voted on Thursday to unwind all of its hedge fund investments in a sign of the growing dissatisfaction with high fees and low returns. If the clip doesn't play, watch it here.

Third, Ron Mock, CEO of Ontario Teachers' Pension Plan, Canada's largest single profession pension plan, talks about the fund's investment strategy. Unlike others, Ontario Teachers invests wisely in hedge funds where it actively monitors these investments, but it also invests directly in private equity, real estate and infrastructure where it gets a much bigger bang for its buck (see my comment here).

Lastly, I can't help but think that Showtime's Billions is fanning this anti-hedge fund attitude among common people working hard for a living and not collecting billions in fees from public pension funds no matter how poorly they perform. Watch the trailer and scenes from the season finale below. The show is way too Hollywood but I'm hooked mostly because I love Paul Giamatti and Damian Lewis (both great actors).

On that note, let me remind all of you reading my comments to please take the time to subscribe and/or donate to my blog on the right-hand side under my picture. Have a great weekend!





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