When Rhode Island announced last week that its State Investment Commission will slash its investment in hedge fund strategies by more than $500 million over the next two years and reallocate these funds to more traditional investment vehicles, the state’s general treasurer, Seth Magaziner, cited performance as the main reason.
“While our pension system has achieved positive performance and beaten our benchmark since I took office, I believe that we can do better,” Magaziner stated in a press release. A majority of the nearly $8 billion in assets in the pension fund will be invested in low-fee index funds, he added.
It is hard to blame Rhode Island for scaling back its hedge fund portfolio if you look at the portfolio’s recent performance, especially the equity funds. In the first eight months of this year, nine of the 16 hedge funds in Rhode Island’s portfolio are in the red. Ten of Rhode Island’s funds are losing money over the most recent 12-month period, while three of them are negative for the most recent three-year period. The pension’s equity hedge fund portfolio is down 1.6 percent for the year through August, compared with a 3.4 percent gain for Chicago-based data tracker HFR’s HFRI Equity Hedge (Total) Index.
Rhode Island’s “real return” hedge fund portfolio — which consists of mostly multistrategy, macro and systematic funds like New York–based D.E. Shaw and Co.’s Composite fund, London-based Brevan Howard Capital Management’s flagship fund and London-based Winton Capital Management’s Winton Futures Fund — has fared much better. It is up 3.11 percent through August, compared with a 0.9 percent loss for the HFRI Fund of Funds Composite Index over the same period.
Rhode Island hasn’t publicly disclosed which hedge funds it is planning to ditch. Judging by the specific funds in the portfolio, however, it is easy to spot at least a few that are likely to be unloaded.
The Claren Road Credit Fund, managed by New York-based Claren Road Asset Management, has posted a 5.55 percent annualized loss over the past three years for the pension fund. However, this year it is down only 0.73 percent through August. Rhode Island’s investment in the fund was recently worth about $6.1 million.
Last year Claren Road suffered at least $3 billion in redemptions, according to published reports. The firm’s credit fund suffered losses in both 2014 and 2015 after posting single-digit gains in each of the three previous years.
Brevan Howard LP, which has also lost money over the past three years, is one of the pension fund’s largest investments, recently valued at more than $76 million. The fund posted a 1.38 percent annualized loss for Rhode Island during this period and is down 2.54 percent for the year to date. Brevan Howard has suffered sizable redemptions in the past few years after its flagship macro fund posted small losses in 2014 and 2015. Before 2014 the fund had never lost money in any calendar year since its inception in 2003.
The ESG Cross Border Equity Fund, meanwhile, is down 7 percent for the year so far. The fund is managed by New York–based Emerging Sovereign Group, founded by J. Kevin Kenny, which was seeded in the early 2000s by Julian Robertson Jr.’s Tiger Management. It is now part of the Carlyle Group, although Carlyle agreed in August to sell its majority stake back to ESG in a deal that is expected to close at the end of the month.
Another fund that is in the red this year is a leveraged version of the Ascend Partners Fund II, managed by Orinda, California–based Ascend Capital. This version of the long-short fund is down 6.3 percent this year through August.
On the other hand, the best-performing fund in the pension fund’s portfolio is the D.E. Shaw Composite Fund. The multistrategy fund accounts for $95 million of the pension fund’s assets. It has gained about 6 percent this year. Its three-year annualized gain is close to 14 percent, better than any other hedge fund in the pension’s portfolio.
Viking Global Equities is the pension fund’s second-best performer over the past three years. The long-short fund — managed by Greenwich, Connecticut–based Viking Global Investors — has posted a 10.7 percent annualized gain for Rhode Island during this period.
These two funds, at least, are probably keepers.
Note: Due to an error in a Cliffwater report detailing Rhode Island’s investment performance that was posted on the pension’s public website, an earlier version of this story contained incorrect performance information for the Indus Asia Pacific Fund. The fund has returned 9.87 percent net of fees for the year through Sept. 30 and has produced an annualized gain of 7.70 percent for the past three years.
