Raimondo puts 14% in hedge funds, 10 times US median

April 29th, 2013 at 11:02 am by under Nesi's Notes, On the Main Site

RI_pension_allocation_2006_2010_2012Treasurer Gina Raimondo has invested 10 times more pension money in hedge funds than the median state-government retirement system does, a WPRI.com review of financial records shows.

Raimondo, as chair of the State Investment Commission, won unanimous approval in June 2011 of a new allocation strategy for the pension fund’s $7.7 billion in assets that added hedge funds to the portfolio for the first time. As of June 30, 13.9% of Rhode Island’s pension assets were invested in hedge funds.

By comparison, the median state pension plan in the U.S. allocates just 1.4% of its assets to hedge funds, according to a February study of 134 state retirement systems by Wilshire Associates, a Santa Monica-based investment adviser.

However, that number masks wide variation among different plans, with the share of the individual systems invested in hedge funds ranging from zero to as much as 26.5%, according to Wilshire.

Hedge funds are privately managed alternative investments that are only open to sophisticated investors. The Hedge Fund Association says they “can use one or more alternative investment strategies, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage.”

The nation’s largest state pension system, the California Public Employees’ Retirement System (CalPERS), invests only 2% of its assets in hedge funds. At the other end of the spectrum, the top-performing Missouri State Employees’ Retirement System (MOSERS) invests 30.9% of its assets in hedge funds. The Massachusetts Pension Reserves Investment Trust (PRIT) invests 9.4% in hedge funds.

The usefulness of hedge funds is a subject of debate. Asset-management firm Research Affiliates published a critical study last week that concluded: “Sadly, most diversified portfolios of hedge funds have largely failed to live up to their promises, delivering less diversification than investors were encouraged to expect, paired with inadequate returns, especially with their current swollen asset base.”

Raimondo defended the state’s strategy in an interview, saying the hedge funds will reduce the state portfolio’s volatility by exposing it to alternative assets such as commodities and currencies while reducing its correlation with the stock market, though it will also mean higher fees and lower returns.

“Yes, we may give up a little upside,” Raimondo told WPRI.com. “We’ve decided as a team on the State Investment Commission, given how risky the world is and how underfunded our plan is, it’s a prudent decision to maybe give up a little bit of upside in order to protect from the crash on the downside.” Rhode Island’s pension system lost $2.1 billion during the crash of 2007-09 and last year paid out more than it took in.

• Related: Chart: How Raimondo has changed RI’s pension investments (April 4)

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20 Responses to “Raimondo puts 14% in hedge funds, 10 times US median”

  1. doug in south county says:

    I guess the Investment Commission wouldn’t give Gina the cash to go to Foxwoods or Mohegan Sun! PS: The RI Lottery Commission would love for Gina to invest in scratch tickets or Powerball, too.

  2. Bob says:

    Invest it in lemonade shops at the north pole. I couldn’t care less.

  3. SteveD says:

    Wait a minute….I just figured out what Gina is doing. She is deliberately keeping returns far below par, so she can take what little the elderly have away! Hopefully the people of RI will see through this horrible woman once and for all!

  4. snow says:

    SteveD, exactly what I said on Twitter some time ago. Keeping returns low feeds her Wall Street friends (bet they are involved in EngageRI) and makes sure retirees never see a COLA again. Further, as she runs for Gov, the stock market won’t have a chance to embarrass her with high yields as it recovers. She knows exactly what she is doing.

    She also will privitize the public domain and hop on the corporate education wagon too. Her hero is Bloomberg for god’s sake, and her husband is a reform guy at McKinsey. She scary, a true wolf in sheep’s clothing and a dangerous true believer. She is part of the plutocracy that plans to serve RI up for corporate profits. The perfect little incubator for the likes of Gates, Walton, ALEC, and the rest.

    Check out her wedding announcement on line at NYT.com. It states her father was a chemist with Bulova, yet in her RI talking points he was a factory worker. If you will use your father for whatever necessary spin is needed, well, she has little substance.

    1. Raimondo Lies says:

      Not to mention changing her name back from Moffitt for political play. She’s as dirty as dirty can be. I guarantee that when the feds finally look into the Point Judith Capital deal, it’ll come to light that she she ripped taxpayers off harder than Buddy and DiPrete combined. I just hope she ends up in steel bracelets before she can move upstairs at the statehouse and do any more real damage.

  5. William Berube says:

    It’s amazing. I’ve been talking with friends that last few months and we all came to the exact same conclusion as well – that she and her cohorts engineered it so the returns are kept low on purpose so she can funnel money from the retirees to her Wall Street investor friends… and if she is allowed to continue to pilfer the states retirement funds, her and those sons of bitches will bleed it dry completely.

    That Gina Raimondo is a real shark, with a heart the size of a pea and it’s as black as midnight to boot. I hope there’s a hell Gina!

    1. Boris Beluga says:

      William,

      You should be thanking her. Why don’t you reserve your condemnation of her until you find out how the hedge fund investments performed in 2013? I think you will be thanking her, unless you don’t like $$$ and just want to tear her down for political purposes.

  6. Bob says:

    awwwww…you poor poor 40 somethings might have to start working again? $60k/yr just ain’t what it used to be eh?

    1. doug in south county says:

      Bob: My mother really appreciates your comment. At 101 years old, her nursing home costs went up again this year (much more than SS cola) and yet her teacher’s pension has no COLA again thanks to Gina and people like you who continue to drink the kool-aid. Her pension is about $24K a year, not your $60K guesstimate of what pensioners receive.

  7. William Berube says:

    Bob – Thank you for your erudite commentary.

  8. SteveD says:

    If you think fees are high now, wait for the hybrid plan to kick in. Anyone in the private sector with a 401K knows one thing, ain’t no one retiring except the fund managers!

  9. Boris Beluga says:

    So what? How do the state unions who benefit from the pension funds ever expect is the fund to earn more than 1% a year if not invested in some riskier funds such as hedge funds? If the pension fund is all in ultra-low risk funds, then you can only expect a very low annual rate of return. There is currenly a Bull market in equities and severe Bear market in muni bonds and other traditionally low-risk funds. So it’s up to the pension recipients. Do you want low risk and low reward. Hello? That is how Wall Street works. You pension lost $200M last year due to past mismanagement. It will take some riskier investments to cover that loss and others that would happen, because your pension is set up to pay put far more that is will earn at a 1% rate of return. Don’t blame hedge funds for that mess.

  10. Boris Beluga says:

    Dont the union leaders have any influence over how the state invests the pension funds? Why do the union leaders pretend they are 100% powerless to adjust how the pension funds are invested? Did they or did they not review Gina’s plan before it was executed? Seems like unions just want to bully Gina because of her supposed anti-union attitude. Elect Caprio again and go back to the 1-2% annual rate of return. That only means your pensions become insolvent faster. Do any of you even know what rate of return the fund needs to generate annually to meet the pension pay-out obligations? You don’t. You just expect the taxpayers to keep plowing money into the fund, not matter how poorly it has been set up. Fact is, the fund needs to take more risk to get much higer returns or it on a path to insolvency. This has been widely reported. And…thanks to the hedge funds, i bet the pension fund rate of return exceeds 10% for 2013. Will you thank Gina if that happens?

  11. Boris Beluga says:

    Steve D. You don’t know what you are talking about with regard to private sector 401K. I have one and so do most RI private sector workers. If a person has any skill whatsoever in selecting the mutual funds within their 401k, then they should have seen a GREAT gain in their 401K value in past couple of years. Mine has come roaring back, following the 2007 crash that affected everyone. Of course, the state employees are in la-la-land and feel that the ups and downs of the market should NEVER affect their investments. Sorry, but welcome to reality. Investments go up as well as down. Invest wisely and you have many more up years than down. Invest ultra conservatively during a booming Bull market and you miss a great opportunity. But that seems to be what you want Gina to do. It’s a poor investment strategy, and any real investment pro would tell you so. Bottomline is: What do you expect your pension fund to generate as annual rate of return? That is what determines how many risks are appropriate. The days of 7% returns for low-risk investments are LONNNNNNGGGGG gone, hate to break the news to ya.

  12. Boris Beluga says:

    Comparing it to other states is not exactly fair either. Most other states have properly managed their pension funds for decades, unlike the situation in RI. Because RI’s pension fund is in such horrid condition, overburdened by unsustainable promises made to union members, those in charge of the fund likely feel under presure to take some added but reasonable risks (hedge funds for example). Unless the rate of return improves substantially, the financial outlook of the RI fund is dire. All those states who are 0% invested in riskier, management-fee oriented (hedge) funds are probably quite solvent and quite pleased with the 2% annual rate of return, which is sustainable because their funds have been run with integrity and are not heading “underwater” as RI’s is. What we have in RI is a forced attraction to riskier funds, in hopes of restoring long-term solvency. Thing of it as a gambler at a black jeck table who has already gambled away this months mortgage payment. That gambler may bet a bit aggressively in hopes of recouping the loss. So it is in RI, and it may be the only reasonable way to recoup it.

  13. Boris Beluga says:

    This suggests is may be a very wise strategy, doesn’t it??

    “At the other end of the spectrum, the top-performing Missouri State Employees’ Retirement System (MOSERS) invests 30.9% of its assets in hedge funds.”

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