State House News Service
BOSTON – State Treasurer Timothy Cahill supports a new investment strategy for the state’s faltering $28 billion pension fund that calls for up to 5 percent of assets to be invested in hedge funds. A proposal developed over several months by Cahill and a seven- member investment committee will be put before the Pension Reserves Investment Management (PRIM) Board for a vote.
The pension fund has shed nearly $7 billion in assets since the recession began. More than 250,000 public employees depend on its assets and state appropriations to pay their retirement benefits.
The proposal calls for investing less in domestic equities and investing more in real estate, venture capital and the timber industry, Karen Sharma, a spokeswoman for Cahill, said. Nearly 40 percent of the fund’s assets are currently invested in domestic stocks. Cahill’s goal is to reduce investment risks and better control the volatility of the fund.
“The treasurer wants the board to be just a little more conservative, by and large because the times are so different now with the market,” Sharma said. Investing in hedge funds would be something new for the state pension fund.
The international nonprofit Hedge Fund Association estimates that the $400 billion to $500 billion industry is growing at a rate of 20 percent per year, with 7,000 active hedge funds.
Hedge funds often feature strategies based on hedging against market downturns. The association says a popular misconception about hedge funds is that they are volatile, but only 5 percent of hedge funds fall into the more risky category of global macro funds. The funds, by their design, also often face less government regulation. Based on board records, fund assets are invested as follows: domestic equity, 39.6 percent; international equity, 15.9 percent; fixed income, 23.4 percent; real estate, 6 percent; alternative investments, 6 percent; emerging markets, 3.5 percent; high-yield debt, 3.5 percent; and timber, 2.1 percent.
Over the past five years, domestic stock investments have lost 1.25 percent, international equities have dropped by 1 percent and investments in emerging markets have taken a 4.4 percent hit, records show. During the same period, fixed-income securities generated an 8 percent return, alternative investments gained 6 percent and real estate investments produced a 10 percent return.
