(Bloomberg) -- Rhode Island Treasurer Seth Magaziner said the state's $7.7 billion pension fund is cutting its allocation to hedge funds in half over two years, as high fees eat into returns and some of the investment pools provide less diversification than expected.
Rhode Island will reduce its investments in hedge fund strategies by more than $500 million and reallocate the money to more traditional asset classes in low-fee index funds, Magaziner, 33, said in a news release. Rhode Island joins pension funds in New York City and California's Public Employees Retirement System, the largest U.S. pension, in cutting hedge-fund investments.
“With pension costs comprising a large percentage of state and local budgets, the stronger performance projected under our 'Back to Basics' strategy can save millions for taxpayers and strengthen retirement security for our public employees,” Magaziner said.
Stock-hedge funds lost 3.4 percent for the year ending Aug. 31, compared to a 2.83 percent gain for the HFRI Equity Hedge (Total) Index, according to the pension fund. By contrast, “real return” hedge funds, which are less volatile, have beaten a comparable HFRI index over three years 4.02 percent to 2.51 percent.
New Allocation
The $2.9 trillion hedge fund industry is in the midst of the biggest shakeout since the financial crisis. This week Perry Capital said it was closing its flagship fund after almost three decades. London-based Nevsky Capital closed its doors and Tudor Investment Corp. dismissed about 15 percent of its workforce in August.
Rhode Island will cut its hedge fund allocation to 6.5 percent from 15 percent, said Evan England, a spokesman for Magaziner. Rhode Island's current hedge fund assets are about $1.1 billion.
“Some of our hedge funds have performed very well, produced strong returns and not shown market correlation, as they're supposed to. A majority of them have not lived up to their billing,” England said.
England said the state is still in the process of finalizing which funds will be terminated.
“We will only be keeping funds that have and continue to show consistent returns and non-market correlation.”
--With assistance from Katia Porzecanski and Katherine Burton To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net. To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net, William Selway
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