CONTROLLING THE HEDGE FUND THREAT TO PUBLIC PENSION FUNDS

WHEREAS, financial managers have used aggressive tactics to convince public pension funds worldwide to invest billions of pension dollars into largely unregulated hedge funds; current public pension investments in hedge funds total $310 billion, according to Chief Investment Officer magazine (“Public Pensions Still Hungry for Hedge Funds”), representing nearly 10 percent of all hedge fund capital; and

WHEREAS, reporting by Bloomberg (“Hedge-Fund Mediocrity Is the Best Magic Trick”) confirms that hedge funds are extremely risky investment vehicles and that their rates of return underperform, thereby costing workers’ pension funds billions in revenue; and

WHEREAS, hedge funds and other large pools of private money pose a serious threat to our communities: Since the 2008 financial crisis, private sector enterprises, while promising cities and counties help to repair their crumbling infrastructures, have increasingly taken over public services like emergency care, water supply and firefighting, often with negative effects for the populace. Chicagoans, for example, well remember the scandalous deal made by the city to hand over parking meter administration to a private sector enterprise, with the result that taxpayers have little to show for it, apart from rising parking rates and the burden of being saddled with a bad contract for the next 65 years; and

WHEREAS, as the New York Times (“In American Towns, Private Profits from Public Works”) has reported, citizens of Bayonne, N.J., saw water rates rise nearly 28 percent after a Wall Street investment fund began to manage the city’s water system. In a measure of residents’ distress, people are falling so far behind on their water bills that they face liens being placed against their homes; and

WHEREAS, underperformance, high risk and high fees are the reasons that unions and public employee pension funds are now questioning whether to continue to invest in hedge funds. Consider:

• The Illinois State Board of Investment (ISBI) decided to remove hedge funds from the board’s investment portfolio because they were confusing and underperforming, with unjustified high fees. As a result of this withdrawal, according to Chief Investment Officer magazine (“ISBI Chair Explains Why Illinois Ditched Hedge Funds”), the state has saved $75 million per year in money manager fees;
• The $55 billion New York City Employees’ Retirement System (NYCERS), which had invested in hedge funds since 2010, voted to liquidate its $1.7 billion allocation “as soon as practicable” due to “exorbitant fees” and weak returns;
• In the United Kingdom, the RBS Group Pension Fund, which manages pensions for current and former employees of the Royal Bank of Scotland and is one of the largest pension funds in the UK, has been steadily divesting from hedge funds, part of a risk-reduction strategy that has helped it beat its investment benchmarks;
• In the Netherlands, Dutch pension fund PFZW announced that it has completely divested from hedge funds, citing poor performance, high cost and complexity as the reasons for discontinuing;
• State pension funds in New Jersey, Rhode Island and Kentucky have all slashed their hedge fund investments by more than half; and
• The California Public Employees’ Retirement System (CalPERS), which was one of the first pension funds to invest in hedge funds, zeroed out its hedge fund portfolio in 2014, pulling out $4 billion in investments, citing high fees and weak performance as the reasons:

RESOLVED, that the American Federation of Teachers will partner with community organizations to inform city governments about the threat from hedge funds and private equity firms; and

RESOLVED, that the AFT will provide our state federations with information about the implications of weak hedge fund performance and the actions taken by pension funds in Illinois, New York, California and other states to liquidate their poor-performing hedge fund investments; and

RESOLVED, that the AFT will call for full transparency among both hedge funds and private equity firms, including public reporting, whenever public sector retirement funds are involved.