Skip to comments.Put NYC pension fund in minority hedge funds: official
Posted on 12/05/2011 8:25:49 AM PST by reaganaut1
New York City, weighing how best to invest some of its $109 billion pension money in hedge funds, should hire so-called emerging managers, said Public Advocate Bill de Blasio.
Emerging managers include women- and minority-owned hedge funds, which are fairly new and thus typically manage less money than older, more established rivals.
Furthermore, women- or minority-owned hedge funds outperformed their much larger established peers over the last five years, according to a study by Barclays Capital released in June.
"We'd be missing a big opportunity to grow the fund in a tough fiscal climate if we only add emerging managers as an afterthought," De Blasio wrote in a letter to City Comptroller John Liu. The letter was sent in the fall and released to Reuters on Friday.
"If we only stick with the managers traditionally in our Rolodex, small and newer managers who typically generate bigger returns will be left out," De Blasio said.
Liu oversees the city's five pension funds. By early next year, the pension system is expected to make its first direct investments in hedge funds, a spokesman for Liu said on Friday.
"We are beginning to build a direct hedge fund portfolio, which will be approximately 4 percent to 5 percent of each participating NYC pension fund and should ultimately approach $4 billion," the spokesman said.
New York City, like many of cities and states, is finding the pension benefits it granted public workers increasingly unaffordable. The recession has compounded the problem by reducing tax collections.
The city's contribution to its five pension funds has soared to $8.4 billion in the current $67 billion budget from $1.5 billion in the $42 billion 2002 budget when Mayor Michael Bloomberg took office, a mayoral spokesman said.
(Excerpt) Read more at reuters.com ...
The guys with real hedge funds are licking their chops. Trade against these new guys? Sure, any time.
hmm... why is my BS meter pinging on that one? if they "outperform" why isnt NYC using them already?
Your BS meter is probably right. Another explanation is that smaller funds that make it through the first couple of years probably have good returns (the losers have been eliminated), and that the smaller firms are newer and have a somewhat larger minority ownership than the more established ones. That they may have gotten those returns through increased risk, or been lucky (relatively few bets; survivorship bias) isn't taken into account, and doesn't make necessarily make them good prospects for managing large sums of money.
All in all, I'd say that the thrust of the statement is along the lines of "we want to hire minorities, so let's find some justification. And, when the returns lag, who cares, as we can always hit the taxpayer for any pension shortfall."
Small asset managers tend to outperform big ones over a time period of a few years.
It’s partly because it’s easier to find a good place to invest the first million dollars than 100th million dollars. Assuming the manager has any skill at picking good investments, the first money goes to the best investments. Pretty soon, it doesn’t make sense to put more money in those investments, so the manager starts to buy less-attractive ones. Each additional investment tends to lower the average return of the whole fund.
So reason number one is that it’s inherently harder to invest a lot of money well than it is to invest a little money well.
Another reason why small funds do better than big ones is because of the statistical methods used to calculate the average returns.
Some funds — based on both skill and luck — do better than others. Small funds with substandard returns don’t tend to last very long. If you look at the 5-year returns of today’s funds, you’re NOT counting the ones that were so bad that they are no longer operating. When you average the survivors, they look better than they should because the really bad ones aren’t included.
This favors small funds. Small funds that stink are likely to vanish, so the average return of SURVIVING small funds looks good. Big funds that stink are likely to shrink but survive. The average return of surviving big funds includes more “bad” funds than is the case for small funds.
A better way to calculate returns of groups of funds would be to include all the ones that vanished during the comparison period. But since people like to compare the investments that are available today, very few published averages include dead funds.
It seems that the scheme these clowns are promoting is taking advantage of a valid, but perhaps useless, statistical result (small funds are “better”) and using it to funnel investment money to their cronies. They aren’t motivated by getting the best investment returns. They’re just a bunch of well-connected “Eric Holder’s People” scratching each other’s backs with other people’s money.
What’s the problem? Everything’s safe. When it comes crashing down Obama will bail everyone out from his stash.