Mass. Pension Board Doubles Back on Hedge Fund Allocation

August 6, 2009 ( - Fresh from a year in which the value of state of Massachusetts' public pension holdings plummeted 24%, officials have decided to cut their hedge fund position from 12% to 8% or about $3 billion.

A Bloomberg news story said the move by the Massachusetts’s pension reserve investment management board reverses a five-year effort to goose pension returns by beefing up alternative investment holdings.

Chief Investment Officer Stanley Mavromates said assets gained from the reallocation away from hedge funds will be invested in equities, which account for about half of the approximately $37-billion portfolio.

According to Bloomberg, Cahill was among three of the eight board members to vote for a target hedge fund allocation of 11% while Leslie Kirwan, Governor Deval Patrick’s administration and finance secretary, was among the five voting for the 8% asset allocation target. “We all have to understand we’re making a bet on what assets will do well,” said state Treasurer Timothy Cahill, board chairman, according to Bloomberg. “Ultimately, we don’t make decisions based on the short-term, but we get measured on the short-term.”

Bloomberg said New Jersey and other states are likewise rethinking their alternative investment posture after first embracing the idea.

Massachusetts invested in hedge funds through its absolute return portfolio, which fell 14.4% in the year ending June 30, and its portable alpha program, which dropped 46% over the same period.

The fund also lost money in hedge funds when Greenwich, Connecticut-based Amaranth Advisors LLC closed in September 2006 (see  MA Pension, Harvard Feel Loss from Hedge Fund Collapse ) and Sowood Capital Management LP of Boston imploded in July 2007.

Cahill has pursued an aggressive strategy since taking office in 2003 to move more capital into hedge funds, private equity, and other vehicles once seen as too risky for public investments (see Aggressive Investment Strategy Gives MA Pension Trust Good Results ).The strategy has come under fire at times for taking on too much risk in a pension environment (see MA Pension Hedge Fund Investments ‘Like Gambling’ ).