Massachusetts picks 10 more hedge fund managers

Wed Dec 7, 2011 5:45am EST

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(Reuters) - Massachusetts, already a big investor with hedge funds, hired 10 more managers on Tuesday as part of its push into direct investments with these types of portfolios.

Trustees for the $48 billion (31 billion pounds) state pension fund picked a hometown hedge fund, some funds based in London and others from New York to jointly oversee $245 million.

The state pension fund, which began putting money into hedge funds in 2004, will soon have 10 percent of its capital, or $5 billion, invested in these kinds of portfolios.

Jonathon Jacobson's Boston-based Highfields Capital, William Ackman's New York-based Pershing Square Capital Management and Yan Huo's London-based Capula Investment Management are among the newcomers, who will be given $25 million each to invest.

The selection of this group comes less than two months after Massachusetts began going it alone with hedge funds and hired its first 11 individual managers. Today's move completes the pension fund's $500 million pilot program into direct investing -- something which has been finding favor with big investors as returns fall off and costs are being cut.

"If the pilot program is successful we will be moving more hedge fund assets out of the fund of funds program into the direct program," said Michael Trotsky, the pension fund's executive director.

Massachusetts' intent to go it alone, at last in part, comes as investment returns are off and high fees -- both at the individual funds and at funds of funds -- are leaving a bad aftertaste and prompting state treasurers to reconsider.

Indeed, some industry experts speculate that pension funds' drive to cut costs may eventually prompt them to put money with traditional asset managers, who are building up their alternative investment capabilities, instead of selecting high-priced hedge fund managers.

A year ago, Massachusetts, which has a relatively new treasurer, Steven Grossman, began looking at direct hedge fund investments and signaled that it might stop using the handful of funds of funds with which it has had money for years.

Until now, Massachusetts, like many other state pension funds, has relied largely on funds of funds to help select hedge fund managers and oversee these types of investments. It employs Arden Asset Management, Grosvenor Capital Management, Pacific Alternative Asset Management Company, K2 Advisors, and the Rock Creek Group as fund of funds.

For the calendar year 2011, the state's pension fund has returned 2.0 percent, with private equity investments and real estate investments providing the biggest lift. Hedge fund investments lost 2.18 percent for the state fund.

Over the last three years, though, the Massachusetts fund earned 3.88 percent with its hedge fund investments, beating the benchmark, which was up only 1.87 percent.

It has been a difficult year for some of the hedge fund industry's biggest names. Even some of those selected by Massachusetts were in the red some of the time this year.

Some of the funds the state selected on Tuesday have been favorites with pension funds for a while. Pershing Square manages money for New Jersey and New Mexico, while Capula was selected by Wisconsin when that state made its first-ever hedge fund allocation in February.

In addition to Highfields, Pershing Square and Capula, others receiving $25 million to manage are Brigade Capital, Davidson Kempner Capital Management, Indus Capital Partners, Samlyn Capital and Winton Capital Management.

Glenview Capital Management will oversee $15 million, and Ascend Capital will invest $30 million for the pension fund.

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