NYC Pension Funds to Invest With D.E. Shaw

D.E. Shaw & Co. and Brevan Howard Asset Management LLP each will get $350 million from New York City’s police, fire and civil-employee pensions as the retirement plans expand into hedge funds.

The pensions, with about $70 billion in assets as of Nov. 30, will also invest $200 million with Brigade Capital Management LLP, Michael Loughran, a spokesman for city Comptroller John Liu, said in an e-mail. With the agreements, New York’s hedge-fund investments will reach $1.35 billion, almost half the $3 billion target, Loughran said.

“We have put together a hedge-fund program that will help further diversify our portfolio and guard against volatility in the market,” Loughran said.

Public pensions, seeking to boost returns after the longest recession since the 1930s and to reduce instability in their portfolios, are increasing assets allocated to alternative investments such as hedge funds and private equity, said Julia Bonafede, president of Wilshire Consulting, which advises retirement funds. Governments have increased pension payments to make up for market losses.

“They’re under such great pressure to catch up,” Bonafede said in an interview yesterday.

Tiny Slice

While pensions are putting more money into hedge funds, they represent a small portion of investments. Public retirement plans with more than $1 billion in assets allocated an average 2.2 percent to hedge funds, according to Wilshire’s Trust Universe Comparison Service.

The 10-year median return for public pension funds with more than $1 billion in assets, before fees, was 5.6 percent as of Dec. 31, according to the service. That’s less than the 7.5 percent to 8 percent returns that the retirement systems count on to meet payments to retirees.

Ten-year returns for New York City’s police, fire and civil-employee pensions ranged from 5.53 percent to 5.78 percent as of June 30, according to documents on the comptroller’s website.

The city’s contributions to the funds have increased to about $8 billion this year from $1.2 billion in 2002, when Mayor Michael Bloomberg took office. New York Governor Andrew Cuomo has proposed offering a 401(k)-type alternative to new public employees and, for most, raising the retirement age to 65 from 62 to hold down future costs.

Seeking Out Opportunity

Last year, the city’s police, fire and civil-employee pensions hired Permal Group Ltd. to invest in hedge funds.

The city’s teachers’ and educational administrators’ pensions, with $43.6 billion in assets, haven’t allocated money to hedge funds, Loughran said.

David Shaw, a former Columbia University computer science professor, founded D.E. Shaw in 1988. The New York-based firm, which manages $23 billion, specializes in using computer models to identify money-making opportunities, according to its website. More recently, it has expanded into private equity, venture capital and distressed debt.

Brevan Howard, based in London, was co-founded in 2003 by former Credit Suisse AG trader Alan Howard. Since its founding, its clients have made $15.7 billion, according to research by LCH Investments NV. Brevan Howard’s Master Fund gained $3.2 billion last year.

While hedge funds may offer better returns than stocks and bonds, pensions pay higher fees to gain access to these loosely regulated investment pools. Most charge 2 percent of assets as a management fee and 20 percent of the profits.

New York City’s five pensions paid $395.7 million in investment fees in the fiscal year ending June 30, according to the city’s annual financial report.

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net