Mass. pension fund posts 14 percent gain
The Massachusetts pension fund gained nearly 14 percent in 2010 and increased its assets by nearly $6 billion, slightly outpacing the fund's goals.
Strong financial markets in December helped the results as bonds, private equity, and stocks produced high double-digit gains. Hedge funds were the laggards, returning just 6.3 percent for the year -- a disappointing result that helped fuel a move to change the way the state manages these investments.
About 8 percent of the $48.3 billion state fund is invested in hedge funds, all of that through middlemen called funds-of-funds that spread the money across a number of firms. The pension board today agreed to start managing some of the $3.6 billion directly in hedge funds, instead of through the middlemen. Under the plan, the board would hire a consultant to help it invest about $500 million directly in top hedge funds.
The state currently pays nearly $30 million in fees to the funds-of-funds. That's on top of the significant fees that the underlying hedge funds charge.
"We think we can save significant fees, and we think we can eliminate significant manager overlap,'' said Steve Grossman, the new state treasurer and chairman of the pension board. The pilot test is scheduled to be underway by year end. If it goes well, Grossman said, the state would likely invest much more of the hedge fund money directly.
The pension fund's executive director, Michael G. Trotsky, a former hedge fund manager who became head of the pension's management group last summer, has questioned whether the state is getting its money's worth for access to hedge funds. The state has lost small amounts of money in some hedge fund investments after a number of scandals and failures in recent years.
The current review of funds-of-funds was sparked in part by last year's FBI raids on a number of hedge funds for alleged insider trading. The state at first didn't even know if it had exposure to the raided funds, because the intermediary firms don't disclose where they invest unless asked under such extreme circumstances. The pension fund learned that it did have $66 million in two of the raided funds, and that three of the firms it does business with all had small amounts of money with one of the raided firms.
The move to invest directly in some hedge funds comes as the new treasurer starts his review of the pension fund. Former Treasurer Timothy P. Cahill led the charge for hedge fund investments at the state starting in 2004, but he championed funds-of-funds, arguing that they were the least risky way to invest in the sector.
Grossman, citing the recent FBI raids, said, "I don't think you avoid the risk by going though the fund-of-funds approach."