NEW YORK (Reuters) - Massachusetts, an early investor in hedge funds, has no plans to give in to pressure and start making direct investments in these loosely regulated portfolios, the state pension fund’s executive director said on Monday.
The $52 billion fund, called the Pension Reserve Investment Trust, has relied on hedge funds of funds to select 140 hedge fund managers since it first began putting money in this asset class in 2004.
Funds of funds traditionally charge heavy fees on top of the hedge funds’ fees but they had been popular because they are supposed to spread the risk of hedge fund investing.
Now that the Massachusetts bet on hedge funds is paying off — the fund returned 11.9 percent last year, handily topping its 8.25 percent actuarial rate and ranking among the best performing state founds in the country — pressure is mounting to cut out the middlemen and make the hedge fund investments directly.
But Michael Travaglini, who has been running the fund since 2004 when Massachusetts first made a 5 percent bet on hedge funds, said his 23 staff members don’t have the time or expertise to beat funds of funds at their own game.
“I’ll pay the double layer of fees,” Travaglini said at the Reuters Hedge Funds and Private Equity Summit on Monday, adding that no one has made a compelling investment case to begin direct hedge fund investments.
“If we tried to do it alone, we would have to pay a lot more in costs for lawyers and due diligence and even the experts on staff who would have enough experience to select the funds,” he said, adding “If I took that in-house I’m not sure the hedge funds we would select would be different or better.”
Many investors, including some large pension funds and endowments, are now trying to save some fees and do the work themselves. Harvard University, for example, invests roughly half of its $35 billion endowment in-house.
But for the Massachusetts pension fund, which still has most of its assets in traditional investments where managers mostly do not use leverage, or borrowed money, or sell stocks short, it would be impossible to imitate its downtown Boston neighbors at Harvard’s investment arm, Travaglini said.
The Massachusetts fund, which adjusts its asset allocation every three years and last overhauled it in 2006, has been using hedge fund of funds Arden Asset Management, Ivy Asset Management, PAAMCO, K2 Advisors and Rock Creek Group since the beginning. In the last year, net of fees, Arden returned 1.3 percent while PAAMCO returned 13 percent for the fund.
While these managers have put Massachusetts funds into some of the industry’s worst blowups — the fund was in both Amaranth Advisors and Sowood Capital — they have also generally done well, Travaglini said.
“Even with the blowups, we’ve exceeded the performance expectations.”
(For summit blog: summitnotebook.reuters.com/)
Editing by Phil Berlowitz