MassPRIM Goes On Offensive In War of Words

Mar 24 2006 | 8:08pm ET

By Deirdre Brennan 

Massachusetts Secretary of State William Galvin has state pension fund managers and advisors scratching their heads over comments he made last week in which he blasted hedge funds and their use in pension funds. Galvin said that he feels the $40 billion Massachusetts Pension Reserves Investment Management board has invested too much in hedge funds, which he views as high-risk investments.   

MassPRIM, which is chaired by Massachusetts Treasury Secretary Tim Cahill, currently invests 5% of its portfolio in six fund-of-hedge funds and plans to double the amount invested in the vehicles to $4 billion by year-end.   

"I think [Galvin] is looking at it from an individual investor's point of view," said Cahill, who is a strong supporter of the plan having exposure to hedge funds. He added, "He is looking at the blowups."   

Cahill said that five of the six top performing managers with which MassPRIM invests are fund-of-hedge funds. "They have added the most value of any of the managers we have," he said.

Mike Travaglini, executive director of MassPRIM, said that no one in his office understands the basis of Galvin's comments. "For MassPRIM, the inclusion of hedge funds has had the impact of lowering the overall risk to the portfolio," he said. "We think for any large institutional investor there is a place for hedge funds as a small part of a diversified investment program."  

Brian McNiff, a spokesman for Galvin's office, said the secretary stands by his views that hedge funds are too risky for public plans, but what he is really most concerned about is legislation that is pending in Congress that would raise the ceiling on the percentage of a hedge fund portfolio that can be derived from ERISA pension plans. He thinks the new, higher ceiling would relax oversight on hedge funds. According to McNiff, Galvin would instead like to see increased oversight and regulation of alternative investment managers.      

Currently, 25% of a hedge fund's assets under management can come from an ERISA pension plan. The legislation, which is receiving strong support from the hedge fund industry, would raise this level to 50%. The ERISA requirements don't govern MassPRIM directly because it isn't an ERISA plan, however, they do govern the hedge funds in which the pension plan invests, meaning those hedge fund managers who don't want to comply with the increased oversight mandated by ERISA will turn away pension money.  

Cahill said that although MassPRIM isn't an ERISA fund, hedge funds still treat it like it is. "It makes it harder to put our money with the best hedge fund managers," he said, adding that raising the ceiling to 50% would allow MassPRIM to have more investment choices. Cahill explained that when MassPRIM first started investing in fund-of-funds almost two year's ago, it found that it kept hitting up against ERISA's 25% rule.

Bob Dennis, the investment director for The Public Employee Retirement Administration Commission, which oversees and monitors the Massachusetts Public Pension Systems, including 104 local pension plans, is also puzzled by Galvin's comments.  

"Mr. Galvin is way off base casting doubt on MassPRIM's investment board," he said, adding that the pension fund is one of the top performers in the country. Last year the pension fund returned 12.7%, outperforming 95% of its peers, according to the Trust Universe Comparison Service, which is run by Wilshire Associates.  

Dennis said he sides with Cahill, believing that hedge funds have a place in pension funds that are large enough to oversee and manage the investments properly. Dennis added that part of the reason MassPRIM has been so successful is because it doesn't do anything rash and it doesn't invest in the most aggressive, riskiest hedge fund strategies. 

"[MassPRIM] studied hedge funds for more than a year before they made an investment," he said. Though he added, "Hedge funds are not for everyone. They are for boards that have the expertise to do due diligence and to manage them."  

Meanwhile, the North American Securities Administrators Association, a group of state officials who oversee financial instruments, hasn't directly weighed in on the Massachusetts squabble, but like Galvin, it opposes the bill in Congress. The group is scheduled to meet April 4 in New York to discuss the issue, as well as other topics facing the industry. Galvin is slated to speak at the event, which is open to the public.

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