There’s a fund-of-funds contest unfolding in Danvers, Massachusetts. The Essex Regional Retirement Board, citing poor returns, is pulling half of the $30 million it invested in a state-run portfolio. The board, which controls $272.5 million, will choose a fund of hedge funds in September in which to invest that $15 million and then — after one year — consider allocating the entire $30 million to whichever of the two funds has done best. Essex’ foray into hedge funds began in March 2006 with an investment in the PRIT Absolute Return portfolio, up 11.21 percent for the fiscal year ended June 30, 2006, and 13.86 over the next 12 months.
“The state fund did well the first couple of years we had it,” says Timothy Bassett, the Essex board’s chairman and executive director.
But it has been downhill from there. Although PRIT, which is run by Boston-based Massachusetts Pension Reserves Investment Management, hasn’t released its returns for the fiscal year ended June 2008, Bassett says that it was down 2.79 percent for calendar year 2008 through July 31 — failing to deliver the protection Essex had hoped for. “A hedge fund allocation is supposed to smooth out the awry periods,” Bassett notes, “and the state fund had a much bumpier ride than we’d anticipated.”
The PRIT investment came after the pension board cleared a state-mandated hurdle that requires public funds to have at least $250 million in assets before investing in hedge funds. Bassett says the decision to jump into hedge funds was easy and that the PRIT fund of funds was an attractive option for its diversification and for the implicit vote of confidence it had gotten from other state and municipal funds that had given it money. “We thought that it would offer an important asset class and could contribute to performance,” Bassett explains. “And with the PRIT fund we weren’t making a solo bet.”
Essex initially allocated the maximum amount of its assets allowed by the state: 5 percent. The Massachusetts Public Employee Retirement Administration Commission increased the maximum to 7.5 percent in September 2006, then raised it again in 2007, to 10 percent. Each time, Essex increased its hedge fund allocation. The rest of its portfolio remains divided among equities (57.5 percent), fixed income (17.5 percent), real estate (10 percent) and private equity (5 percent).
With the help of New York–based Segal Advisors, Essex released a request for proposals in June that yielded responses from 32 fund-of-funds firms. At the end of September, the board will interview six finalists and will ultimately choose one to manage the $15 million. A year from now it will compare those returns with PRIT’s. That’s also when it will consider moving all of its hedge fund allocation into whichever fund is the winner.
