New York City comptroller changes tone on pension fund Alt Holdings

New York City Comptroller Brad Lander appears to be gearing up for alternative investments.

Lander, which is the custodian of $274.7 billion in assets held by New York’s five public pension funds, recently called on state lawmakers to update a law and increase the amount that City pension funds can invest in alternative assets at 35% versus 25%. He said that if that could not be done, then the cap for global equities should be raised to 30% instead of 10%.

Lander recently testified before the state legislature and asked for an update to the so-called “basket clause.” The basket clause allows up to 25% of a New York public pension fund’s assets to be allocated to investments not otherwise expressly permitted by state law, or that exceed permitted percentage limits. He said the law “does not reflect the realities of the modern investment world and hinders our ability to prudently diversify our portfolio, maximize our risk-adjusted returns and save money over the long term.”

Lander said “either of these requested legislative changes would allow New York State’s public pension funds to prudently diversify their portfolios based on current market conditions and earn potentially higher returns.” while maintaining a constant and prudent level of risk”.

In his speech, Lander stressed that he was not alone in seeking higher returns through private investments, as many pension funds and endowments currently invest more than 25% of their portfolios in assets that would be taken into account in the basket clause of New York. Lander praised Yale University’s $42.3 billion endowment, noting that it has well over half of its investments in private assets and “has achieved returns that consistently outpace other portfolios.”

Times have changed, he said, because institutional investors are unlikely to be able to invest as they have in the past while meeting return targets. Despite a banner year for many institutional investors in 2021, the general consensus among economists is that investors should prepare for a low yield environment, prompting many to seek higher yields.

However, Lander’s testimony has a different tone than the strategic plan he released last year when he ran for office, in which he said he would consider reducing the city’s pension fund investments in private equity and hedge funds. He also called hedge funds, private equity and private real estate funds “risky and speculative” in an April 2021 press release accompanying the plan.

“Some of the city’s pension funds are in riskier assets such as hedge funds, private equity and private real estate funds,” Lander’s plan said. “Due to the highly speculative and often extractive nature of these investments, and the high fees some charge, the strategic planning process will consider all costs and benefits of the funds’ alternative asset allocation strategies.”

The basket clause at issue also restricts investments in a broader set of asset classes, such as alternative credit, global equities and infrastructure. This means that by increasing the ceiling of the basket clause, the Lander can also seek higher returns by increasing the diversification of the city’s assets.

Lander declined to comment on the story.

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Tags: alternative investments, alts, basket clause, Brad Lander, global equities, hedge funds, New York City, pension funds, private equity, private real estate, state legislature