Press Release

October 17, 2016

Contact: Richard Loconte, 212-709-1691


The combination of high fees and underperformance of CRF’s hedge fund investments have cost the pension system $3.8 billion over the last eight years.

The State Comptroller has also failed to ensure transparency of costs related to private equity fund investments.

Department of Financial Services Superintendent Maria T. Vullo today released a report finding that the New York State Common Retirement Fund (CRF), the investment arm of the New York State and Local Employees’ Retirement System and the New York State and Local Police and Fire Retirement System (“collectively, the System”), for years has invested pension system funds in high-cost underperforming hedge funds and nontransparent private equity funds.  The New York State Comptroller is the sole trustee with complete authority and responsibility for the System addressed in the DFS report.  The concerns highlighted in the DFS report are in contrast to actions taken by state pension managers nationwide, which have cut or eliminated similar investments. The report, which covers fiscal years April 1, 2008 through March 31, 2016, is the first in a series of reports to be released by the Department of Financial Services (DFS) regarding the investment activities of pension systems regulated by DFS.

“Pension fund managers across the country have cut or eliminated exposure to these overpriced and underperforming investments, while the Office of the New York State Comptroller has stood still and spent pension system funds chasing performance that continues to fall far short,” said Financial Services Superintendent Vullo.  “Just last week, the Comptroller admitted that hedge funds are not delivering the returns to even come close to justifying the sky-high fees that these fund managers have been charging the pension system for years.  Hedge fund managers continue to reap hundreds of millions of dollars in fees, regardless of their performance, which is a rip-off at the expense of pensioners.  DFS examiners are looking at the issues raised in today’s report, as well as several others, as we examine all of the pension systems under DFS’s jurisdiction. ”

In addition to the State System addressed in this report, DFS has authority to audit and review the New York State Teachers Retirement System, the New York City Employees Retirement System, the City of New York Fire Department Pension Fund, the Teachers Retirement System of the City of New York, and the New York City Police Pension Fund.

The 20-page DFS report finds that the Comptroller has over relied on so-called “active” management by outside hedge fund managers, who consistently have underperformed low-cost diversified index investments while charging huge fees.  Over the last fiscal year alone, the CRF has paid more than $150 million in fees to hedge fund managers for managing $8 billion in assets, or approximately 4.5 percent of the fair value assets of the System.  In comparison, CRF paid $59.2 million in fees and commissions for the substantially greater $61.5 billion invested in domestic equities, 34.5 percent of the fair value assets of the System, representing less than one-tenth of the 1 percent fee on assets under management.  Shockingly, CRF has paid out $1 billion in fees to hedge fund managers over the last eight years, while these assets have woefully under-performed, costing the system $3.8 billion in excess fees and underperformance.  Hedge funds are the worst of the six asset allocation classes with a 10-year record.

The DFS report also finds that the State Comptroller continued the gamble by almost doubling (increasing by 86 percent) the System assets poured into hedge funds, despite experiencing three years of massive hedge fund underperformance.  The underperformance in 2009, 2010 and 2011 – when System hedge funds returned at least 10 percentage points less than the System’s general Global Equity category – deprived the System of $627 million, $277 million and $391 million, respectively.  This three-year deficit of $1.3 billion increases to $1.5 billion once excess fees are considered.  Rather than correcting this misguided investment scheme the Comptroller put more money – 86% more by 2016 – into the worst performing investment allocation.

Still reeling from the System’s incredibly poor hedge fund returns in fiscal years 2009 - 2011, the Comptroller’s failure to adjust and anticipate potential future losses cost the System another 10 percentage point deficit in fiscal year 2014.  The 2014 loss was made worse, because the Comptroller had already increased the System assets speculating on hedge funds by more than one-third – from $4.5 billion at the end of fiscal 2011 to $6.1 billion at the start of fiscal 2014 – and that ten percentage point lag, plus the excess fees, cost the System $862 million in 2014 alone.  By pouring more assets into hedge funds, the cost of a single bad year jumped by $350 million in 2014 versus 2011 – a 68 percent greater hit to pensioners and taxpayers.  Deficits have continued since, with the streak of negative results from the Comptroller’s hedge fund gamble costing $690 million in fiscal years 2015 and 2016.

The report also highlights the excess fees paid by the System.  In each of the past eight years, the System has paid excess fees of at least $40 million (in 2009 and 2010) and at least $100 million in every year since (including $240 million in 2014) in an apparent effort to boost returns – returns that could have been easily achieved through broad index funds.

“Given the $3.8 billion hole the Comptroller’s hedge fund gamble already has dug for the State pension system, taking away the checkbook may be the only way to safeguard the pensions of state employees, and the pocketbooks of taxpayers on the hook for System deficits,” said Superintendent Vullo.

The DFS report also finds that the Comptroller’s Office has not put into place adequate controls to address transparency issues with the System’s investments in private equity, where the managing general partners may be imposing hidden costs and expenses that would otherwise have been credited against fees otherwise owed, and paid, by the limited partner investors – including CRF.  Although private equity as an asset class has reported above average returns over the past ten years, management’s control and discretion over the valuation of privately-held assets – for which there often are no independent market-set values – leaves open the real possibility that when the investments are redeemed, some portion of the excess profits will vanish as market prices replace mark-to-model theoretical prices.

As set forth in the report, based on its findings, DFS is considering certain regulatory reforms for the hedge fund investments, as well as reforms proposed in the report to address the lack of transparency of the private equity investments.  DFS will examine these issues in upcoming examinations, and will release reports as necessary to serve the public interest.

To view a full copy of the report DFS released today, please visit, link.