Aug. 27–Retirement funds of city and state cops and firefighters may soon be tied to some of the wildest get-rich investments hatched on Wall Street.
William Thompson, the city controller, and Alan Hevesi, the state controller, are both considering investing a small part of the municipal workers’ pension funds into hedge funds, their spokesmen confirmed.
“If there is a wild, wild West area in the investment world, this is it,” said Pat McGurn, a vice president at Institutional Shareholder Services. “These are highly unregulated entities that can basically put their money into anything.”
Pension funds have been struggling to boost returns as the stock market faltered through the unsteady economy. Hedge funds may provide a way to improve their performance.
“The events of the last few years have been extraordinary,” said Hevesi spokesman John Chartier, citing the slowing economy, terrorist attacks, and corporate scandals. “Our pension fund has taken a big hit.”
Hedge funds, which hold speculative investments that don’t often need stocks to rise to boost profit, are generally available for wealthier investors.
Such funds sometimes use derivatives and mathematical models, and are less tightly regulated than other types of investments.
For the past year, the Securities and Exchange Commission has been reviewing hedge fund operations and expects to issue a report in the next few months.
Officials from the controllers’ offices acknowledged the challenges of hedge fund investing.
“These risks have to be carefully considered,” said Hevesi spokesman Chartier. “We have to determine whether the risks outweigh the benefits.”
Neither the city nor the state has made a definitive decision about investing in hedge funds, which many other states and cities already do to boost returns in their retirement plans.
New Jersey is considering investing a portion of its $62 billion pension fund assets in hedge funds to boost returns, Bloomberg News reported.
Numerous hedge funds have provided higher returns for their investors than the typical stock or mutual fund, especially during down markets.
“If pension funds had invested in hedge funds in the last few years, they would have been better off,” said Roy Smith, a professor at the NYU Stern School of Business. Smith estimates that hedge funds, which he said college endowments including Harvard and Princeton use, provided a return of around 10 percent during the recent bear market.
“No one says you should take all your money and put it into one fund or a fund with a bad record,” Smith said. “As an asset class, hedge funds are an acceptable thing for pension funds to do.”
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