Galvin says Cahill relies too much on hedge funds

Too much Massachusetts pension money is going into risky hedge funds, said secretary of state William Francis Galvin, putting himself at odds with state treasurer Timothy P. Cahill, who has praised the funds' strong returns.

Galvin singled out the growing hedge fund stakes held by the Massachusetts Pension Reserves Investment Trust, whose board Cahill chairs.

It now keeps 5 percent of its $40.2 billion invested in hedge funds, and plans to bring that number to 10 percent, or $4 billion, by the end of this year. Cahill says the hedge funds helped the fund return 12.7 percent last year while actually lowering its risk.

But in an interview yesterday, Galvin questioned whether the hedge funds are an appropriate vehicle for the 176,500 current or former public employees whose retirement money is handled by the trust.

''I'm not happy about it," Galvin said. ''I've told Cahill that. He keeps pointing at his return rate. I just think as a long-term strategy, it's like gambling."

Like mutual funds, hedge funds pool money from investors but face much less regulation and often pursue riskier strategies such as arbitrage or short-selling, betting that a stock's value will decline.

Galvin said there may be circumstances where pension money might best be kept in hedge funds, but that in general they should be avoided. ''The smaller the amount, the less offensive it is. It's like taking very strong medicine," he said.

Cahill said in response that the turn to hedge funds he oversaw in 2004 was actually a way to minimize the risk of the state's investments. The five management companies the state now uses have had less volatility, or risk, compared with the Standard & Poor's 500, a common measure of stocks.

Cahill said that ''with all due respect to the secretary of state, our mandate is to get 8.25 percent returns, so we have to take some risks to do that." Other tactics the pension board has pursued probably present more risks, such as its ''private equity" investments, he said. Private equity and venture capital investments represent about 6 percent of the fund's portfolio.

The hedge-fund firms hired by Massachusetts, including Rock Creek Group of Washington, D.C., and K2 Advisors of Connecticut, are ''fund of fund" advisors, meaning they spread money across various hedge funds. Only now are rules passed by the Securities and Exchange Commission coming into effect that require individual hedge funds to register themselves, opening them to more scrutiny.

Still in search of higher returns, pension trustees are piling in. Surveys by Pensions & Investments, a Chicago-based trade newspaper, found that 37 of the largest public and private pension funds had $29.1 billion invested in hedge funds last year, up from $14.4 billion in 2003.

Other state-employee pension funds that are moving into hedge funds include New Jersey, Virginia, and Pennsylvania, according to the North American Securities Administrators Association, a group of state officials overseeing financial instruments that in some ways competes with the SEC. It plans a meeting April 4 to discuss growing sales of hedge funds to individual ''retail" investors as well.

One member of the North American group is Galvin, who oversees securities sold in Massachusetts and has taken steps against various hedge funds such as a suit filed in February against International Management Associates LLC, an Atlanta hedge fund also facing complaints by several former National Football League players that it mishandled their money.

Galvin said he is also concerned with a broad pension bill moving through Congress that would make it easier for hedge funds to manage more pension money by increasing how much pension money they can hold before stricter fiduciary duties kick in.

Ross Kerber can be reached at kerber@globe.com.