The $28-billion New England state’s Pension Reserves Investment Management Board, or PRIM, agreed at a meeting on Thursday to make its first hedge fund investment, designating 5% of the funds it manages for 250,000 public sector workers into the funds, according to news reports. The $1.4-billion plunge is one of the largest commitments to the class of any state pension fund in the nation.
Under the plan approved Thursday, the pension fund will reduce its US stock holdings from 38% to 26%, and its non-US stocks from 17% to 15%. It will also cut back on US bonds, reducing holdings from 16% to 10%. The fund will allocate 5% of its assets to hedge fund investments and increase its investment in timber from 2% to 5% and real estate from 6% to 10%, according to Dow Jones.
Santa Monica, California-based consultant Wilshire Associates prepared the report on which Massachusetts Treasurer Tim Cahill’s recommendation to consider the asset class were based. The state retained Wilshire in December to evaluate the state’s portfolio.
As of year end, PRIM was down $6.5 billion from its August 2000 high of $32.5 billion and was down 9% for 2002 (see Massachusett’s Pension Fund Down 9% ). Rising with the overall upward trends in the markets, the fund has rebounded in 2003, gaining 5% as of April 30. As of April, domestic stocks comprised 41% of the fund’s portfolio, while fixed income investments represented 22%, according to the Boston Business Journal.
Cahill has long been an advocate of hedge fund investment. In fact, the freshman state treasurer recently cited an inability to invest in hedge funds as a contributing factor for disappointing returns for the Norfolk County Retirement System (see Treasurer Blames Lack of Hedge Funds for County Losses ). Cahill was treasurer for that county prior to his election to statewide office. When Cahill became Norfolk County treasurer in 1996, one of his first moves was to pull Norfolk out of the statewide system run by the Pension Reserves Investment Management Board, saying Norfolk could do better on its own (Norfolk lost about 2.3% per year, on average, on Cahill’s watch, while the state fund shed about 5.2% per year over that period).
In late February, PLANSPONSOR solicited feedback from defined benefit plan sponsors on their attitudes and actions regarding the alternative investment class. Nearly 40% of almost 300 survey respondents already have made a commitment to alternative investments, defined as hedge funds, real estate, or private equity. Hedge funds were held in just a quarter of the responding portfolios, however, when hedge funds were present, they tended to command a greater allocation than either of the other two classes. The average allocation to hedge funds was 10.7%, and the median allocation to the class was 8.5%, compared to just 6.7% and 5.1% for private equity, and 7.1% and 6.0% for real estate (see Room to Grow ).
Cahill, which has lobbied PRIM’s board to consider hedge fund investments since taking office in January, advocates the so-called absolute return style of investing, which seeks to make money in good times and bad. Massachusetts has not invested in hedge funds yet because the state said it didn’t have the staff to do so. While the median survey projected return in the PLAN SPONSOR /Deutsche Asset Management survey was 8% for hedge fund returns next year, that figure rose to 10% three years from now.
Industry data suggests that the average hedge fund is up about 7% year-to-date through the end of May (see Van: Hedge Fund Index Up 3.7% in May ). Last year, hedge funds lost about 4%, well above the 22% hit taken by US equity mutual funds (see Hedge Funds Down In December and 2002 ).
Massachusetts expects to pick a consultant within six months to help it and finish the allocation to hedge funds in the next two to three years.