New York Pensions to Add Hedge Funds to Reduce Volatility

Three of New York City’s five public pension funds are seeking to add as many as 15 hedge funds for direct allocations to reduce price swings in stocks and improve investment returns.

The New York City Employees’ Retirement System, New York City Police Department and New York City Fire Department, which have about $70 billion in assets, are searching for event-driven funds, commodity trading advisers and global macro and relative value managers, according to Seema Hingorani, head of public equities and hedge funds at New York City Comptroller’s Office. The focus is on event-driven strategies as the pensions now have more allocated to global macro funds and CTAs, she said.

“We’re meeting as many event-driven managers as we can,” Hingorani said in a telephone interview last week.

New York City’s main goal is to reduce equity volatility, Hingorani said. Assets at the five funds fell to about $74 billion from $115 billion after the 2008 global stock market plunge before rebounding to $127.8 billion as of the end of this September. Two pension plans in San Jose, California, and Kentucky Retirement Systems are also allocating capital to hedge funds to diversify investments and improve returns.

The New York City pensions will probably have “very little” in long-short equities in the hedge-fund portfolio, Hingorani said.

Direct Allocations

Event-driven hedge fund managers try to predict triggers for stocks and bonds such as corporate restructurings, acquisitions, management changes and share sales. Commodity trading advisers buy and sell commodity linked and other futures. Macro funds bet on global economic trends and relative-value strategies attempt to profit from price differences between assets.

About $1.7 billion of the funds’ approved allocation of about $3.5 billion has been invested, Hingorani said. New York City devoted $450 million to fund of funds Permal Asset Management Inc. in 2011. Earlier this year, New York City made five direct hedge-fund investments -- in Brevan Howard Asset Management LLP, D.E. Shaw & Co., Brigade Capital Management LLC, Caspian Capital Advisors LLC and BlueCrest Capital Management LLP’s BlueTrend fund -- with the help of consultant Aksia LLC.

New York City seeks to post an 8 percent to 10 percent net return with 5 percent to 7 percent volatility a year in its hedge-fund portfolio, Hingorani said. It plans to invest all $3.5 billion directly in hedge funds over the next few years across a total of 15 to 20 managers.

Initial allocations will typically range from $100 million to $350 million, Hingorani said. The approval process for managers involves three boards, one each for the three pension funds.

‘More Nimble’

New York City will mostly consider hedge funds with more than $1 billion in assets, while also looking at building investments in emerging managers, Hingorani said. The pensions have about $6 billion invested in smaller, newer managers outside of hedge funds.

“Smaller managers can be more nimble,” she said. “We’re out there meeting much smaller managers, much smaller than our ticket right now has been. We’re trying to do all of our due diligence and get comfortable.”

The comptroller’s office is the investment adviser and custodian of New York City Teachers’ Retirement System and New York City Board of Education in addition to New York City Employees’ Retirement System, New York City Police Department and New York City Fire Department.

Pension Returns

The pension funds returned between 4.3 percent and 4.7 percent in fiscal year 2011, according to the website of the comptroller’s office.

Hingorani, 43, joined the comptroller’s office in April 2010. She was most recently global director of fundamental research with Pyramis Global Advisors, a Fidelity Investments company. Before that, she started her own hedge fund after running a long-short equity portfolio of media and entertainment stocks at hedge fund Andor Capital Management LLC. Hingorani started her career at T. Rowe Price Group Inc. as an analyst in media and technology.

Prior to joining the comptroller’s office, she worked on education initiatives for children in India through a nonprofit and was a member of the National Finance Committee for Hillary Clinton’s presidential campaign. Her interest in public service grew, which led to her current position.

“The hedge-fund program is the right thing for New York City’s pension funds,” she said. “It makes a lot of sense for diversifying the entire portfolio.”

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