NY State Pension Cuts FOF Stakes

(Reuters) – New York state’s pension fund has cut its so-called fund of funds investments to about $500 million from $5 billion since January 2008, after deciding direct investments were preferable, a spokesman said Tuesday.

Fund of funds invest money in hedge funds on behalf of their investors, and they helped the state gain access to “blue chip” funds when former Comptroller Alan Hevesi began using them in 2005, said Robert Whalen, a spokesman for the current Comptroller Thomas DiNapoli.

DiNapoli determined after a review that the strategy of investing in 184 funds through 7 fund of funds was “suboptimal” due to redundant investments, unwanted correlations between the funds’ results and the stock market’s performance, and costly fees, Whalen explained.

Clipping some of these fund managers has a side benefit. Placement agents who have been hired by them and who have been swept up in the state attorney general’s pension kickback probe can no longer collect ongoing fees.

For example, former hedge fund manager Barrett Wissman, the first of two individuals to plead guilty in Democratic Attorney General Andrew Cuomo’s kickback investigation, was formerly associated with Texas-based Hunt Financial Ventures.

New York’s pension fund invested a total of $100 million with Hunt Financial Ventures, which only produced a $7 million return from January 2005 to December 31, 2007, when the investment was ended, according to the comptroller’s data.

The fund of funds largely are being replaced by the comptroller’s staff, though they will still use fund of funds on occasion, the spokesman said. The pension fund, which has declined about 25 percent since its official value was last pegged at $122 billion, now has about $3 billion of hedge fund investments.

DiNapoli is still reviewing all transactions that took place under former state comptroller Alan Hevesi, a list that includes private equity funds. The spokesman said the review includes issues like conduct: “Are their hands clean, was there some measure of culpability?”

Both New York state and New York City’s pension funds voted to block new capital investments with private equity firm Quadrangle due to its ties to the pension probe, but were overruled by other investors. For more details, please see: [ID:nN24449787].

The pension has not yet decided if it will exit its Quadrangle investment, the state comptroller’s spokesman said.

Other hedge funds DiNapoli axed that also have links to Cuomo’s probe include Memphis-based Consulting Services Group and Pequot Capital Management.

The fund of funds the state pension fund still has the biggest stakes in are Ramius Advisors, LLC and Mezzacappa Management, LLC. “We’re going down to zero,” the spokesman said, noting it takes time to whittle down the existing stakes.

(Reporting by Joan Gralla; Editing by Chizu Nomiyama)