After going back and forth for years on the benefits and drawbacks of hedge funds, managers at Massachusetts’ Brockton Contributory Retirement System thought they had decided once and for all not to go there. But that was before this year’s market turbulence ravaged the $317 million fund. Now, owing to a paucity of better options, Brockton has put funds of hedge funds back on the table.
“The last ten months have been pretty rugged,” says Harold Hanna, the retirement fund’s executive director since the late 1980s. “We’re looking for some wild ideas on how we can recover.”
The fund, based in Brockton, a city of 95,000 about 25 miles south of Boston, started thinking about funds of hedge funds even before it was big enough to invest in them. All of the public pension funds in Massachusetts are regulated by the Public Employee Retirement Administration Commission, which mandates that a system have at least $250 million under management before it invests in hedge funds. Although Brockton didn’t reach that mark until two years ago, Hanna says directors of the fund had been batting around the topic since the early 2000s in anticipation of the day it could invest.
But when the Brockton fund, which is for retired municipal workers, finally reached the requisite size, it got cold feet. It had raised $100 million by issuing pension obligation bonds — debt instruments that were distributed to underwrite pension liabilities — and found itself 90 percent funded. It was in pretty good shape, in other words, so Hanna and the Brockton board of directors agreed that funds of hedge funds posed more risk than the fund needed.
The unforgiving markets of 2008 have forced a revisiting of that decision. Brockton’s assets, which totaled nearly $400 million in January, have declined by almost a quarter; returns for the year through September were down 17.49 percent. Hanna estimates that the fund’s liabilities are now no more than 80 percent funded.
In light of the difficult markets, Brockton’s board voted in August to proceed with a fund-of-funds search. Equities — particularly international ones — have been the weakest performer for the fund this year, so Hanna expects any hedge fund allocation to be shifted from that asset class. But before a fund-of-funds search begins in earnest, Brockton plans to formally name a consultant. Its present adviser, Norwalk, Connecticut–based Evaluation Associates, may be re-signed, according to Hanna, but the fund may also opt to go with someone else.
The Brockton portfolio is currently divided into a 48 percent allotment to domestic equity, 14 percent to international equity, 16 percent to domestic fixed income, 6.7 percent to international fixed income, 7.6 percent to real estate, 4 percent to venture capital and 3.7 percent to cash.
“I expect there will be some major changes,” Hanna says, “but I can’t predict what they will be.”
