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NYC Pension Earns $40M Over 10 Years, Pays Fund Managers $2B

173 points by arielm 12y ago

math 12y ago
Related: The best study I'm aware of that attempts to estimate the distribution of fund manager skills is this one by Fama and French (of 3 factor model fame) from 2009: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021
- watmough 12y ago
  You are missing the wood for the trees. The real skill is collecting 2.5 billion in fees, for essentially no value added.
uptown 12y ago
Here's the original story: http://mobile.nytimes.com/2015/04/09/nyregion/wall-street-fees-wipe-out-2-5-billion-in-new-york-city-pension-gains.html?ref=nyregion&_r=1&referrer= http://mobile.nytimes.com/2015/04/09/nyregion/wall-street-fe...
- tnb234 12y ago
  Non mobile version : http://www.nytimes.com/2015/04/09/nyregion/wall-street-fees-wipe-out-2-5-billion-in-new-york-city-pension-gains.html http://www.nytimes.com/2015/04/09/nyregion/wall-street-fees-...
coob 12y ago
Isn't this true of most actively managed funds?
tinkerrr 12y ago
The New York Times article seems to be talking about the extra gain, which I presume means gain in addition to beating the benchmark. Here's the quote: "Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees". I read this as meaning that the extra gain meaning gain minus benchmark gain was $2B and most of it was eaten by fees (which is still bad, but not as bad as the article and its title seem to suggest).
- deleted 12y ago
  [deleted]
- vasilipupkin 12y ago
  I don't think that's correct. For example, the article says Until now, Mr. Stringer said, the pension funds have reported the performance of many of their investments before taking the fees paid to money managers into account. After factoring in those fees, his staff found that they had dragged the overall returns $2.5 billion below expectations over the last 10 years.
  - tedunangst 12y ago
    There appear to be two uses for the word "expectations" here, for two different things. There was the original expectation that the fund manager promised, that was exceeded. Then there's the expectation of what NYC would be able to withdraw, which failed to account for fees. Expectation A: Fund value will be X. Reality: Fund value is X + 2b. Expectation B: NYC can cash a check for X + 2b. Reality: NYC only gets X + 40m. The reporting isn't very clear, IMO.
    - vasilipupkin 12y ago
      Agree. Reporter did a poor job. I would think the expectation should be the relevant benchmark, meaning, passive portfolio like Vanguard invested in similar proportions of stocks and bonds.
chollida1 12y ago
I'll be honest and admit this is one area where hedge funds do get gready. Most funds work on a model of 2 and 20, meaning they take 2% of assets they manage to run the fund and then take 20% of the profits as their compensation. This works when you manage 100 million as the 2% can cover most costs, but gets absurd when you manage 100 billion. In cases like this the 2% gets absurdly big and you just can't hire enough people or buy enough tech to eat up this money. It becomes free profit, and that is borderline abuse. The idea with hedge funds originally was, we think we can beat the market and we only get paid when we do, out of the 20% of profits that we take. Essentially we are betting on ourselves and we eat only when we do well, With 2% of 100 billion, it turns out you get paid no matter how well you do. Venture capital funds are equally bad in this regard:( Pension funds need to be better about negotiation fees. EDIT Someone asked me what to look for when investing in a hedge fund. There are really only 3 things: 1) fees, 2 and 20 is standard and if you are investing a "small" amount, less than 20 million, you should expect to pay this. 2) lock up time. Generally you should be able to redeem at the end of any month with 20 days notice, ie if you want to redeem for May 1st, you need to inform them by April 10th. No fund should be able to lock your money up for more than a month, though some will try. There is an exception for this in funds that by definition invest in illiquid assets, such as venture capital or real estate that can take a year or more to mature, but even then 90 days is absolute max you should tolerate. ie if a VC tells you you are locked up for 5 years, and some will, you should tell them thank you and move on. 3) track record. Don't invest in any hedge fund less than 5 years old, unless you have special knowledge or a healthy risk appetite. Its just not worth giving someone else the chance on your dime. Most new funds are started by people leaving a fund and if they are good they get seeded by their previous fund, friends and family. Make them prove themselves before you put yoru money into them.
- no_wave 12y ago
  4) If you're investing any "small" amount, don't invest it in a hedge fund. Invest it in a passively managed (index) fund. I pay .3% a year on my assets and get market returns.
  - vonmoltke 12y ago
chrisa 12y ago
The question which isn’t answered in the article is: how would the fund have done if passively invested in the market? If the market lost money over the same time period, then although extremely high, the fees are a relatively "good deal" (since the fund was up $40M, and the alternative would be losing money). If they’re talking about the last 10 years however, it looks like the market should have returned about 70%, which makes the fund manager's performance look even worse.
- totalrobe 12y ago
  S&P 500 returned about 92.09% from 2004 - 2014. They referenced it being a 160 billion dollar fund so they really should have been looking at returns of closer to 100 billion... http://ycharts.com/indicators/sandp_500_total_return_annual http://ycharts.com/indicators/sandp_500_total_return_annual *although if all large pensions/trusts/endowments were passively invested in the market, some of these financial companies on the s&p list would not have been able to steal so much from pensions so i'm wondering what type of effect that would have had on total market returns
  - kasey_junk 12y ago
    Not that it impacts the heart of your comment, but that is not risk adjusted returns. To get that exact return you'd have to have 100% allocation in the s&p 500, which would also be cause for articles...
  - encoderer 12y ago
    Nice try. $SPX is not where you want $160bn of pension money. 10% maybe, with similar investments in treasuries, commodities, cash, etc.
    - bradleyjg 12y ago
      I somehow got downvoted for pointing this out yesterday, but with target return rates of 7-8%, pensions can't invest in what most of us would consider a prudent portfolio. At least not in a low inflation environment (since targets seem to all be nominal rather than real). While I would agree that a pension fund shouldn't be in all equities (or investment with similar risk profiles) if the fund managers are mandated to target 7.5% returns its hard to see how they can include a sizable cash or treasury component and expect to hit that.
jongala 12y ago
Can someone clarify this? Because the article explains: > "Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found." Note "surpassed expectations" in there. That makes it sound not like the total return was $2B but that the return was $2B above projections, and after fees this was functionally erased leaving return at projected level. Am I misunderstanding the language here?
- mynameismonkey 12y ago
  My read is that the fund managers created an additional $2B in exceeded expectation/value, then billed 97% of that created value. In other words, stay home, don't use these guys, don't pay them $2B, get the same returns. That's how I understand the point.
  - jongala 12y ago
    Yeah that's how I'm reading it but then I guess the question then becomes whether the projections were made specifically with a hedge fund strategy in mind or if they would have been the same for a more conventional investment approach. I'm not trying to discount the take-away that the fees are very high regardless of the projection basis, but I think it's important to understand the difference. If these criticisms are not clearly reasoned or communicated, I think that fuels the perception in the financial community that these complaints are hysterical and unfounded and should be dismissed.
  - tedunangst 12y ago
    There's no guarantee that using other managers would have resulted in the same "expected" returns.
- tedunangst 12y ago
  It also makes it sound like the entire fund value was reduced to "just $40 million".
bjourne 12y ago
It's what has become of capitalism. First there were producers, they sold what they created themselves and made a profit. Then there were merchants who bought and sold and made a profit on the difference. Then investors who invested in merchants and made a profit by collecting interest on lended money. Nowadays, it's the fourth level of capitalists, the fund owners, who takes peoples money and invest it into investors who then invests it into merchants. A common scam is to email 10000 people betting picks. To half of them you predict that team A will win and to the other half that instead team B will win. Repeat the process with the ones who got the right picks and after a few iterations you have a small group of gullible people who think you have supernatural sport prediction abilities. Fund managers do the same thing all the time. They have a portfolio of funds, some of which purely due to chance will not beat their market line and will then be folded into those who did. Then new funds are started to fill the void. This way, almost every fund can appear to beat the market average. That's just one of the many tricks available to fund managers. Another is choosing the right index to compare your fund against and selecting which time period puts it in the most favorable light. Maybe the performance over the last three years were extra strong or maybe it had a dip so let's compare over the last seven years instead? The worst thing is that you can't abstain from playing the game. Your retirement money is on the stock market and fund managers will take a big slice of it in fees whether you like it or not.
- slothario 12y ago
  Research low-cost index funds. They're better than managed funds and much, much cheaper. In this day and age, the only person who you can trust managing your money is yourself - and turns out, if you're smart about it, it's not hard at all to do well. But that doesn't change the fact that there is a large segment of the population who are not educated or disciplined enough to avoid learning about that, and they have to live their whole lives with the anxiety of mismanaged funds.
- kasey_junk 12y ago
  > The worst thing is that you can't abstain from playing the game. Your retirement money is on the stock market and fund managers will take a big slice of it in fees whether you like it or not. What are you talking about? There has never been a time where investing was cheaper and there were more options to invest without a fund manager getting a slice. If you want to discount your pension benefit because you don't control the asset allocation (and I think you should, but that is an opinion) that is fine, but it isn't some sort of "rigged game" that you don't have options in.
littletimmy 12y ago
Sooner or later, investors will wisen up to the fact that hedge funds are not an asset class; they are a compensation scheme. Who makes the decision to put pension funds into hedge funds anyway? This is just filtering away money from poor people, who would have seen better returns from an index fund. Disgusting and obscene.
- kasey_junk 12y ago
  > Who makes the decision to put pension funds into hedge funds anyway? Pension fund managers. They are often also well compensated for this decision making process. Many, many hedge funds and ibanks spend as much time/energy courting pension fund managers as they do generating returns. This is because the customers of the pension (the people that will want the benefit) are largely a captive market and are frequently unsophisticated financially. Its one of the many reasons I will not take a job that uses pensions as a benefit (and am baffled when unions fight so hard to keep them).
  - pkaye 12y ago
    Public unions like pensions because they are defined benefit plans and are guaranteed a specific monthly benefit. The risk is passed to the tax payers because they need to cover any poor investments.
    - kasey_junk 12y ago
      Let me rephrase. I don't understand why union members feel comfortable trusting a large portion of their employment benefits to the whims of the legislatures or much more rarely now, private companies, that "garauntee" them, nor to the capabilities of the pension manager. The downside of lack of mobility, lack of choice, and poor performance all seem like they would be deal breakers to me, but again, I've never worked in a pension system. Defined benefit plans can of course be had without using a pension so that seems a red herring.
coldcode 12y ago
If they had simply used a dart board or other randomized device, I bet they would have made the same $40M but saved the $2B.
downandout 12y ago
These results actually make sense. The 10 year period covered a tumultuous time in our economy. When the market drops 20%, no fees are paid, but no breaks on future fees are offered either. So let's say they start with $100 billion. The fund loses 20% one year, then rebounds exactly 20% the next. If charging 20% of profits, $4 billion in fees are paid on the $20 billion "gain," even though investors made nothing. They've actually had a net loss of $4 billion after paying fees on their "gains". That is primarily why these numbers seems so ridiculous - the market had a few bad years, and then came back around. The people in charge of deploying this money should negotiate better terms, like paying fees only on net returns over longer periods of time (5 years instead of one year, for example). At the end of the day, it's their own fault for cutting lousy deals. $160 billion gives you a pretty big bargaining chip on fees.
- alwaysdoit 12y ago
  This is why I think people are too quick to dismiss market fluctuations as "noise". As long as there's money to be made from the instability, those ups and downs are signal, not noise.
- VikingCoder 12y ago
  > At the end of the day, it's their own fault for cutting lousy deals. Victim blaming. Well done.
  - vasilipupkin 12y ago
    It would not be surprising if there was a bit of corruption involved in picking the managers, setting the fees, the whole process.
  - jrells 12y ago
    Isn't the blame falling to the pension managers who picked the hedge fund, and the victims are the individual pensioners who each have negligible influence over decisions? Or am I misunderstanding something?
  - downandout 12y ago
icedchai 12y ago
They should've used Vanguard. ;)
icedchai 12y ago
They should've used Vanguard. ;)
robdimarco 12y ago
My county recently changed to using a passive investment strategy for pensions and there is a push for the whole state of PA to change to a similar model. http://www.philly.com/philly/opinion/inquirer/20150301_Follow_the_Montco_model_on_pension_reform_and_save_billions.html http://www.philly.com/philly/opinion/inquirer/20150301_Follo...
encoderer 12y ago
This is why I believe people who think you can just sock money into a "low cost index fund" and never think twice about it are misguided. Even if you end up with most of your money in said low-cost index fund, it's important to be engaged, informed and educated.
- sukilot 12y ago
  How so? The article shows how NOT using an index fund hurts.
  - encoderer 12y ago
    Rather, I think the article is showing us how not being informed hurts. It took them 10 years to understand what was happening with their money? Unacceptable. Learning how investing works, breaking out of the pie-chart bs sent to you in your nice quarterly statements and really understanding how your money is invested.... Like i said, I don't have an opinion on where you put your money but I think the idea that you can hand it over and never think twice because you're in a low-cost fund is misguided.
- lucretian 12y ago
  low cost index funds are passively managed. there's nothing to be informed or educated or engaged about other than having an opinion about the general market. not sure what your point is here.
  - encoderer 12y ago
    If your idea of good financial planning is just putting all your money into $SPY and $QQQ and keeping it there until you need to start withdrawing from it, I fear you're on a dangerous path. Acting as if the only decision is the right and pure choice of total index-fund investment and it all just works out after that is, I believe, wrong. Finance, how the markets work, things of this nature.. we do a poor job of educating people about it. The pension fund outsourced the job of understanding their investments, and I fear people do the same. Of course, this is controversial because... you know... knowledge is power, except finance, you can't know jack about finance... or something?
scott00 12y ago
Primary source: https://comptroller.nyc.gov/newsroom/comptroller-stringer-billions-in-pension-fund-fees-paid-to-wall-street-have-failed-to-provide-value-to-taxpayers/ https://comptroller.nyc.gov/newsroom/comptroller-stringer-bi... The wording of both primary and secondary sources doesn't make the facts uncovered by the analysis particularly clear, IMO. Based on my reading, these are the facts: * Managers of public investments (public stocks, bonds, etc) outperformed their benchmarks by at least $2.1 billion before fees, and charged at least $2 billion in fees. Fees were at least 95% of excess returns, but less than 100%. * Managers of hedge funds, private equity funds, and real estate investments underperformed their benchmarks after fees by $2.6 billion. Amount of fees is not stated.
- rbcgerard 12y ago
  That's the way I read it, heaven forbid they provide the actual report. Also, if we assume 80% of the $160 billion is in public investments that achieved their benchmarks net of fees over the past 10 years $2b in fees seems pretty reasonable at 0.16% ((2 billion /10 years)/(160*.8))
abhigupta 12y ago
This translates to net annual return of 0.0025% :)
Animats 12y ago
This is why pension funds should not be treated as "sophisticated investors", allowed to invest with unregulated hedge funds. The overall performance of the hedge fund industry is on a par with the results here. Most of the returns go to the fund managers. Why anybody invests with those clowns is unclear. Pension funds, as a class, cannot beat the market. They are the market. They should be in index funds and bond funds with very low management fees.
evanpw 12y ago
This article is pretty garbled. Matt Levine is, as usual, excellent: http://www.bloombergview.com/articles/2015-04-09/new-york-discovers-wall-street-charges-fees http://www.bloombergview.com/articles/2015-04-09/new-york-di...

173 points by arielm 12y ago

math 12y ago

Related: The best study I'm aware of that attempts to estimate the distribution of fund manager skills is this one by Fama and French (of 3 factor model fame) from 2009: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021

watmough 12y ago
You are missing the wood for the trees. The real skill is collecting 2.5 billion in fees, for essentially no value added.

uptown 12y ago

Here's the original story: http://mobile.nytimes.com/2015/04/09/nyregion/wall-street-fees-wipe-out-2-5-billion-in-new-york-city-pension-gains.html?ref=nyregion&_r=1&referrer= http://mobile.nytimes.com/2015/04/09/nyregion/wall-street-fe...

tnb234 12y ago
Non mobile version : http://www.nytimes.com/2015/04/09/nyregion/wall-street-fees-wipe-out-2-5-billion-in-new-york-city-pension-gains.html http://www.nytimes.com/2015/04/09/nyregion/wall-street-fees-...

coob 12y ago

Isn't this true of most actively managed funds?

tinkerrr 12y ago

The New York Times article seems to be talking about the extra gain, which I presume means gain in addition to beating the benchmark. Here's the quote: "Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees". I read this as meaning that the extra gain meaning gain minus benchmark gain was $2B and most of it was eaten by fees (which is still bad, but not as bad as the article and its title seem to suggest).

deleted 12y ago
[deleted]
vasilipupkin 12y ago
I don't think that's correct. For example, the article says Until now, Mr. Stringer said, the pension funds have reported the performance of many of their investments before taking the fees paid to money managers into account. After factoring in those fees, his staff found that they had dragged the overall returns $2.5 billion below expectations over the last 10 years.
- tedunangst 12y ago
  There appear to be two uses for the word "expectations" here, for two different things. There was the original expectation that the fund manager promised, that was exceeded. Then there's the expectation of what NYC would be able to withdraw, which failed to account for fees. Expectation A: Fund value will be X. Reality: Fund value is X + 2b. Expectation B: NYC can cash a check for X + 2b. Reality: NYC only gets X + 40m. The reporting isn't very clear, IMO.
  - vasilipupkin 12y ago
    Agree. Reporter did a poor job. I would think the expectation should be the relevant benchmark, meaning, passive portfolio like Vanguard invested in similar proportions of stocks and bonds.

chollida1 12y ago

I'll be honest and admit this is one area where hedge funds do get gready. Most funds work on a model of 2 and 20, meaning they take 2% of assets they manage to run the fund and then take 20% of the profits as their compensation. This works when you manage 100 million as the 2% can cover most costs, but gets absurd when you manage 100 billion. In cases like this the 2% gets absurdly big and you just can't hire enough people or buy enough tech to eat up this money. It becomes free profit, and that is borderline abuse. The idea with hedge funds originally was, we think we can beat the market and we only get paid when we do, out of the 20% of profits that we take. Essentially we are betting on ourselves and we eat only when we do well, With 2% of 100 billion, it turns out you get paid no matter how well you do. Venture capital funds are equally bad in this regard:( Pension funds need to be better about negotiation fees. EDIT Someone asked me what to look for when investing in a hedge fund. There are really only 3 things: 1) fees, 2 and 20 is standard and if you are investing a "small" amount, less than 20 million, you should expect to pay this. 2) lock up time. Generally you should be able to redeem at the end of any month with 20 days notice, ie if you want to redeem for May 1st, you need to inform them by April 10th. No fund should be able to lock your money up for more than a month, though some will try. There is an exception for this in funds that by definition invest in illiquid assets, such as venture capital or real estate that can take a year or more to mature, but even then 90 days is absolute max you should tolerate. ie if a VC tells you you are locked up for 5 years, and some will, you should tell them thank you and move on. 3) track record. Don't invest in any hedge fund less than 5 years old, unless you have special knowledge or a healthy risk appetite. Its just not worth giving someone else the chance on your dime. Most new funds are started by people leaving a fund and if they are good they get seeded by their previous fund, friends and family. Make them prove themselves before you put yoru money into them.

no_wave 12y ago
4) If you're investing any "small" amount, don't invest it in a hedge fund. Invest it in a passively managed (index) fund. I pay .3% a year on my assets and get market returns.
- vonmoltke 12y ago

chrisa 12y ago

The question which isn’t answered in the article is: how would the fund have done if passively invested in the market? If the market lost money over the same time period, then although extremely high, the fees are a relatively "good deal" (since the fund was up $40M, and the alternative would be losing money). If they’re talking about the last 10 years however, it looks like the market should have returned about 70%, which makes the fund manager's performance look even worse.

totalrobe 12y ago
S&P 500 returned about 92.09% from 2004 - 2014. They referenced it being a 160 billion dollar fund so they really should have been looking at returns of closer to 100 billion... http://ycharts.com/indicators/sandp_500_total_return_annual http://ycharts.com/indicators/sandp_500_total_return_annual *although if all large pensions/trusts/endowments were passively invested in the market, some of these financial companies on the s&p list would not have been able to steal so much from pensions so i'm wondering what type of effect that would have had on total market returns
- kasey_junk 12y ago
  Not that it impacts the heart of your comment, but that is not risk adjusted returns. To get that exact return you'd have to have 100% allocation in the s&p 500, which would also be cause for articles...
- encoderer 12y ago
  Nice try. $SPX is not where you want $160bn of pension money. 10% maybe, with similar investments in treasuries, commodities, cash, etc.
  - bradleyjg 12y ago
    I somehow got downvoted for pointing this out yesterday, but with target return rates of 7-8%, pensions can't invest in what most of us would consider a prudent portfolio. At least not in a low inflation environment (since targets seem to all be nominal rather than real). While I would agree that a pension fund shouldn't be in all equities (or investment with similar risk profiles) if the fund managers are mandated to target 7.5% returns its hard to see how they can include a sizable cash or treasury component and expect to hit that.

jongala 12y ago

Can someone clarify this? Because the article explains: > "Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found." Note "surpassed expectations" in there. That makes it sound not like the total return was $2B but that the return was $2B above projections, and after fees this was functionally erased leaving return at projected level. Am I misunderstanding the language here?

mynameismonkey 12y ago
My read is that the fund managers created an additional $2B in exceeded expectation/value, then billed 97% of that created value. In other words, stay home, don't use these guys, don't pay them $2B, get the same returns. That's how I understand the point.
- jongala 12y ago
  Yeah that's how I'm reading it but then I guess the question then becomes whether the projections were made specifically with a hedge fund strategy in mind or if they would have been the same for a more conventional investment approach. I'm not trying to discount the take-away that the fees are very high regardless of the projection basis, but I think it's important to understand the difference. If these criticisms are not clearly reasoned or communicated, I think that fuels the perception in the financial community that these complaints are hysterical and unfounded and should be dismissed.
- tedunangst 12y ago
  There's no guarantee that using other managers would have resulted in the same "expected" returns.
tedunangst 12y ago
It also makes it sound like the entire fund value was reduced to "just $40 million".

bjourne 12y ago

It's what has become of capitalism. First there were producers, they sold what they created themselves and made a profit. Then there were merchants who bought and sold and made a profit on the difference. Then investors who invested in merchants and made a profit by collecting interest on lended money. Nowadays, it's the fourth level of capitalists, the fund owners, who takes peoples money and invest it into investors who then invests it into merchants. A common scam is to email 10000 people betting picks. To half of them you predict that team A will win and to the other half that instead team B will win. Repeat the process with the ones who got the right picks and after a few iterations you have a small group of gullible people who think you have supernatural sport prediction abilities. Fund managers do the same thing all the time. They have a portfolio of funds, some of which purely due to chance will not beat their market line and will then be folded into those who did. Then new funds are started to fill the void. This way, almost every fund can appear to beat the market average. That's just one of the many tricks available to fund managers. Another is choosing the right index to compare your fund against and selecting which time period puts it in the most favorable light. Maybe the performance over the last three years were extra strong or maybe it had a dip so let's compare over the last seven years instead? The worst thing is that you can't abstain from playing the game. Your retirement money is on the stock market and fund managers will take a big slice of it in fees whether you like it or not.

slothario 12y ago
Research low-cost index funds. They're better than managed funds and much, much cheaper. In this day and age, the only person who you can trust managing your money is yourself - and turns out, if you're smart about it, it's not hard at all to do well. But that doesn't change the fact that there is a large segment of the population who are not educated or disciplined enough to avoid learning about that, and they have to live their whole lives with the anxiety of mismanaged funds.
kasey_junk 12y ago
> The worst thing is that you can't abstain from playing the game. Your retirement money is on the stock market and fund managers will take a big slice of it in fees whether you like it or not. What are you talking about? There has never been a time where investing was cheaper and there were more options to invest without a fund manager getting a slice. If you want to discount your pension benefit because you don't control the asset allocation (and I think you should, but that is an opinion) that is fine, but it isn't some sort of "rigged game" that you don't have options in.

littletimmy 12y ago

Sooner or later, investors will wisen up to the fact that hedge funds are not an asset class; they are a compensation scheme. Who makes the decision to put pension funds into hedge funds anyway? This is just filtering away money from poor people, who would have seen better returns from an index fund. Disgusting and obscene.

kasey_junk 12y ago
> Who makes the decision to put pension funds into hedge funds anyway? Pension fund managers. They are often also well compensated for this decision making process. Many, many hedge funds and ibanks spend as much time/energy courting pension fund managers as they do generating returns. This is because the customers of the pension (the people that will want the benefit) are largely a captive market and are frequently unsophisticated financially. Its one of the many reasons I will not take a job that uses pensions as a benefit (and am baffled when unions fight so hard to keep them).
- pkaye 12y ago
  Public unions like pensions because they are defined benefit plans and are guaranteed a specific monthly benefit. The risk is passed to the tax payers because they need to cover any poor investments.
  - kasey_junk 12y ago
    Let me rephrase. I don't understand why union members feel comfortable trusting a large portion of their employment benefits to the whims of the legislatures or much more rarely now, private companies, that "garauntee" them, nor to the capabilities of the pension manager. The downside of lack of mobility, lack of choice, and poor performance all seem like they would be deal breakers to me, but again, I've never worked in a pension system. Defined benefit plans can of course be had without using a pension so that seems a red herring.

coldcode 12y ago

If they had simply used a dart board or other randomized device, I bet they would have made the same $40M but saved the $2B.

downandout 12y ago

These results actually make sense. The 10 year period covered a tumultuous time in our economy. When the market drops 20%, no fees are paid, but no breaks on future fees are offered either. So let's say they start with $100 billion. The fund loses 20% one year, then rebounds exactly 20% the next. If charging 20% of profits, $4 billion in fees are paid on the $20 billion "gain," even though investors made nothing. They've actually had a net loss of $4 billion after paying fees on their "gains". That is primarily why these numbers seems so ridiculous - the market had a few bad years, and then came back around. The people in charge of deploying this money should negotiate better terms, like paying fees only on net returns over longer periods of time (5 years instead of one year, for example). At the end of the day, it's their own fault for cutting lousy deals. $160 billion gives you a pretty big bargaining chip on fees.

alwaysdoit 12y ago
This is why I think people are too quick to dismiss market fluctuations as "noise". As long as there's money to be made from the instability, those ups and downs are signal, not noise.
VikingCoder 12y ago
> At the end of the day, it's their own fault for cutting lousy deals. Victim blaming. Well done.
- vasilipupkin 12y ago
  It would not be surprising if there was a bit of corruption involved in picking the managers, setting the fees, the whole process.
- jrells 12y ago
  Isn't the blame falling to the pension managers who picked the hedge fund, and the victims are the individual pensioners who each have negligible influence over decisions? Or am I misunderstanding something?
- downandout 12y ago

icedchai 12y ago

They should've used Vanguard. ;)

icedchai 12y ago

They should've used Vanguard. ;)

robdimarco 12y ago

My county recently changed to using a passive investment strategy for pensions and there is a push for the whole state of PA to change to a similar model. http://www.philly.com/philly/opinion/inquirer/20150301_Follow_the_Montco_model_on_pension_reform_and_save_billions.html http://www.philly.com/philly/opinion/inquirer/20150301_Follo...

encoderer 12y ago

This is why I believe people who think you can just sock money into a "low cost index fund" and never think twice about it are misguided. Even if you end up with most of your money in said low-cost index fund, it's important to be engaged, informed and educated.

sukilot 12y ago
How so? The article shows how NOT using an index fund hurts.
- encoderer 12y ago
  Rather, I think the article is showing us how not being informed hurts. It took them 10 years to understand what was happening with their money? Unacceptable. Learning how investing works, breaking out of the pie-chart bs sent to you in your nice quarterly statements and really understanding how your money is invested.... Like i said, I don't have an opinion on where you put your money but I think the idea that you can hand it over and never think twice because you're in a low-cost fund is misguided.
lucretian 12y ago
low cost index funds are passively managed. there's nothing to be informed or educated or engaged about other than having an opinion about the general market. not sure what your point is here.
- encoderer 12y ago
  If your idea of good financial planning is just putting all your money into $SPY and $QQQ and keeping it there until you need to start withdrawing from it, I fear you're on a dangerous path. Acting as if the only decision is the right and pure choice of total index-fund investment and it all just works out after that is, I believe, wrong. Finance, how the markets work, things of this nature.. we do a poor job of educating people about it. The pension fund outsourced the job of understanding their investments, and I fear people do the same. Of course, this is controversial because... you know... knowledge is power, except finance, you can't know jack about finance... or something?

scott00 12y ago

Primary source: https://comptroller.nyc.gov/newsroom/comptroller-stringer-billions-in-pension-fund-fees-paid-to-wall-street-have-failed-to-provide-value-to-taxpayers/ https://comptroller.nyc.gov/newsroom/comptroller-stringer-bi... The wording of both primary and secondary sources doesn't make the facts uncovered by the analysis particularly clear, IMO. Based on my reading, these are the facts: * Managers of public investments (public stocks, bonds, etc) outperformed their benchmarks by at least $2.1 billion before fees, and charged at least $2 billion in fees. Fees were at least 95% of excess returns, but less than 100%. * Managers of hedge funds, private equity funds, and real estate investments underperformed their benchmarks after fees by $2.6 billion. Amount of fees is not stated.

rbcgerard 12y ago
That's the way I read it, heaven forbid they provide the actual report. Also, if we assume 80% of the $160 billion is in public investments that achieved their benchmarks net of fees over the past 10 years $2b in fees seems pretty reasonable at 0.16% ((2 billion /10 years)/(160*.8))

abhigupta 12y ago

This translates to net annual return of 0.0025% :)

Animats 12y ago

This is why pension funds should not be treated as "sophisticated investors", allowed to invest with unregulated hedge funds. The overall performance of the hedge fund industry is on a par with the results here. Most of the returns go to the fund managers. Why anybody invests with those clowns is unclear. Pension funds, as a class, cannot beat the market. They are the market. They should be in index funds and bond funds with very low management fees.

evanpw 12y ago

This article is pretty garbled. Matt Levine is, as usual, excellent: http://www.bloombergview.com/articles/2015-04-09/new-york-discovers-wall-street-charges-fees http://www.bloombergview.com/articles/2015-04-09/new-york-di...