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From Donald A. Steinbrugge, CFA – Managing Partner, Agecroft Partners: I would like to share some thoughts regarding New York City Employees Retirement System (NYCERS) voting to exit all hedge funds. Pension funds should always be managed in the best interest of the plan’s beneficiaries. I believe this blanket decision to eliminate a full set of investment opportunities may result in doing the exact opposite. In addition, some of the comments by people associated with the pension fund raise concerns.

The first of these is the pension fund’s consultant stating they can reach their targeted investment returns with less risky funds. One of the main benefits hedge funds provide to institutional investors is to reduce the risk in their portfolios. Hedge fund indices historically have had significantly less volatility than the equity markets. In addition, many hedge fund strategies have very low correlation to long only benchmarks which helps reduce the overall volatility of a portfolio through diversification.

Most pension funds have an actuarial rate of return assumption of 7% to 8%. This is a very difficult return target to achieve using only traditional fixed income and equity investments. On the fixed income side, the US 10-year treasury is yielding less than 2% and fixed income securities will lose value if interest rates rise. On the equity side, stock valuations are above their historical averages with a back drop of tepid global economic growth, and little dr......................

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