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December 22, 2014 at 06:04 AM
(Bloomberg Businessweek) — New York Governor Andrew Cuomo vetoed a bill last week that would have allowed the New York state, city and teachers’ pensions to increase their investment in hedge funds from 25 to 30 percent of fund assets. He cited the high fees and risk associated with hedge funds. The now-dead bill contained a memo justifying its proposed increase:
The portion of the NYCRS [New York City Retirement System] portfolios allocated to public equities is much more volatile than the investments allocated to the basket. As a result, a swing in public markets can push NYCRS dangerously close to the investment cap with no new investments.
That’s a terrible reason to invest in hedge funds. Stocks are supposed to be riskier, that’s why they normally provide higher returns. If the investment board can’t handle volatility it should invest in safer, lower yielding assets—and while that may describe some hedge funds, there are cheaper options out there.
Hedge funds typically charge 2 percent of assets, plus 20 percent of gains, and rarely outperform the stock market. The figure in this BloombergBusinessweek article from last year, plots an index of hedge fund strategy performance compared to the S&P 500 index.
Underperformance is why states including California are pulling out of hedge funds (though they are piling into other risky alternatives like private equity). The sentiment is not uniform, though, and other states, including New Jersey, Ohio, New Mexico and Illinois, are sticking with or increasing their hedge fund investment.
