Hedge funds exit will save taxpayers $14 million annually, $404 million over 20 years
Harrisburg, PA - Pennsylvania Treasurer Joe Torsella today announced that he will be transitioning Treasury’s portfolio out of all so-called “hedge fund” investments, resulting in $14 million in annual fee savings and $404 million over 20 years. This move is a further development in Treasury’s overall low-cost, index-based investment strategy and brings total fee savings over 20 years to more than $700 million.
“Hedge funds add needless complexity, fees, and risks. A focus on asset allocation, with simple and transparent index strategies, allow us to do a better job protecting the Commonwealth’s investments for the long-term than these high-fee, illiquid investments that have simply not delivered. Added complexity and fees does not guarantee added return. Pennsylvanians put their trust in public officials to be prudent when managing their tax dollars. I’m proud of the progress we’ve made to keep our citizens’ tax dollars benefiting the Commonwealth, not Wall Street.”
Pennsylvania Treasurer, Joe Torsella
Torsella has taken significant action to protect taxpayer money by eliminating high management fees paid to Wall Street firms by setting a low-cost indexing investment strategy shortly after taking office. To reduce investment risk and improve returns to taxpayers, Torsella first authorized the transition of more than $2.4 billion in public equity investment holdings to low-cost index strategies. He later expanded the program to include more than $2.9 billion in fixed income investment holdings. Combined, those two indexing moves will save nearly $300 million per year in fees over a 20-year period. This latest move brings the total fee savings over a 20-year period to $704 million.
This decision comes after comprehensive analysis of the historical performance of PA Treasury’s hedge fund portfolio, undertaken with Treasury’s general investment consultant. That study found that a simple focus on asset allocation, using low-cost and transparent index investments, will allow Treasury to better measure and manage investment risk, providing similar returns with less volatility, and much less expensively. Using simple, low-cost, and liquid investment instruments creates a more efficient portfolio that is easily defined, managed, and rebalanced. Treasury’s hedge fund program began in 2008 and was restructured to its current form in 2013. Since 2013, the portfolio has an average annual return of approximately 4.3%, frequently failing to beat its benchmarks, while costing more than $100 million in fees.
On Torsella’s first day in public office, he banned the use of placement agents in state investment contracts. This included a formal ban on all investment contracts with third-party agreements paying a middleman finder’s fee as a reward for acquiring Treasury investment contracts. Torsella also instituted Treasury’s first Code of Conduct policy, which identifies and prohibits actual and perceived conflicts of interest for Treasury investment staff and other personnel.