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New York ripped for wasting money on hedge funds

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Scott Eisen | Bloomberg | Getty Images

New York state has paid hedge fund managers $1 billion in fees during the past eight years with little to show for it, officials charged on Monday.

In a blistering report that criticized both the $2.9 trillion hedge fund industry and New York Comptroller's Thomas DiNapoli's office, the New York State Department of Financial Services said pension investments in hedge funds have been a giant failure, resulting in $2.8 billion in underperformance for the two state retirement systems.

"The state pension system simply gave away tens or even hundreds of millions of dollars in fees every year for 10 years to hedge fund managers, and received no value in return," the department said in a report.

The reason for the underperformance, according to the report, is largely due to "extravagant fees" as well as general lagging of active managers against market benchmarks. The hedge fund industry has long been under fire for its traditional setup of charging fees of 2 percent of assets and 20 percent of returns.

Hedge funds in 2016 have returned 3.46 percent, as gauged by the HFRI Fund Weighted Composite Index. That compares with a 4.2 percent return for the S&P 500.

New York's hedge fund investments have generated respective five- and 10-year returns of 3.69 percent and 3.23 percent, lagging the system's overall returns of 7.25 percent and 5.69 percent. Of the six strategies used in the two plans, hedge funds performed the worst during the 10-year period and next-worst over five years.

In the past year alone, the state has paid $150 million in hedge fund fees despite continued low returns.

DiNapoli's office lashed back at the report, saying the comptroller has been reducing hedge fund exposure and paying lower fees.

"It's disappointing and shocking that a regulator would issue such an uninformed and unprofessional report," Jennifer Freeman, the office's communications director, said in a statement. "Unfortunately, the Department of Financial Services seems more interested in playing political games, so remains unaware of actions taken by what is one of the best managed and best funded public pension funds in the country.

The DFS report notes that hedge funds once employed effective strategies but have since fallen behind as too few managers are chasing too few strategies.

"The comptroller came too late for the market-beating outperformance but just in time to select overpriced and underperforming vehicles for the state pension system," the report said. "Having made this asset allocation, there was ample evidence during and after the recent financial crisis that the experiment was hurting the system, but the comptroller simply continued the bad bet for years."

As of late, hedge funds have had a rough time with some high-profile funds seeing large investor redemptions. In 2014, California's public pension fund, the largest in the country, said it was shedding most of its pension fund exposure, while government funds in Illinois and New York City also either have fled entirely or reduced allocations.

However, the number of pension funds overall involved in hedge funds continues to grow.