MA Fund Approves 5% Hedge Fund Allocation

April 7, 2004 ( - The Massachusetts state pension system on Tuesday agreed to take a $1.6-billion hedge fund portfolio position despite the amount of fees hedge fund managers could reap from the deal.

Pension officials approved allocating about 5% of the state’s $32.7-billion retirement system’s assets in hedge funds to help protect the funds during market downturns, the Boston Herald reported. The pension system’s returns were off 5.3% in 2001 and nearly 9% in 2002, years marked by falling stock prices. Had the state invested in hedge funds, though, those losses might have been smaller, said Stan Mavromates, deputy chief investment officer for the pension system.

But hedge-fund managers also tend to charge much higher fees than do traditional money managers. Of the five “fund of fund” managers hired yesterday, one of them, Arden Asset Management, is asking for a 10% performance fee on gains that exceed agreed-upon benchmarks. Peter Schwarzenbach, a board member, said such fees are “obscenely rich” and could net firms millions of dollars each.

Michael Travaglini, executive director of the system, said the state will bargain hard with the hedge-fund managers to lower fees and set tough benchmarks. Other funds expected to receive state investments are: Silver Creek, K2 Advisors, Pacific Alternative Asset Management and Ivy Asset Management.

Separately, the pension system reported a preliminary first-quarter net gain of 3%.