* State fund exits portable alpha strategy
* Expects $1.6 bln to be returned by end of 2010
* Will redistribute bulk of funds among other managers
(Adds details on plan, quotes)
By Svea Herbst-Bayliss
BOSTON, Oct 13 Massachusetts will remove $1.6
billion from hedge fund managers Blackstone (BX.N), Crestline,
EIM Management, and Strategic Investment Group as it shifts
its investment strategy after suffering recent heavy losses.
Trustees for the roughly $40 billion fund voted on Tuesday
to pull out of four firms that used portable alpha, a once
popular technique employed by pension funds to beat markets
that underperformed during the financial crisis.
"This is a strategic shift and not a dissatisfaction with
the individual managers," said the pension fund's chief
investment officer, Stanley Mavromates.
The move comes at a time many big investors -- ranging from
endowments to pension funds -- are rethinking their strategies
after a brutal year where some trustees said they lost their
taste for riskier investments.
Betting on portable alpha backfired badly for
Massachusetts, costing the fund 46 percent during the year that
ended on June 30. Massachusetts had long ranked among the best
performing public pension funds.
The fund's trustees voted in August to scrap use of the
strategy, but only decided on Tuesday which managers would be
The state will likely have to wait until 2010 to get its
money back. Many hedge fund managers, unlike mutual fund
managers, return investments only periodically.
Mavromates said most funds should be back by the middle of
2010 and all will be returned by the end of next year.
Blackstone is expected to return $200 million while EIM
will give back $172 million. Crestline will return $670 million
and Strategic Investment Group will return $650 million,
STATE STICKS WITH SOME HEDGE FUNDS
Even though Massachusetts, one of the first state pension
funds to bet big on hedge funds, is abandoning portable alpha,
it is sticking with loosely regulated portfolios and even plans
to increase the amount of money it allocates to them by the
middle of next year.
Since making its first bet on hedge funds five years ago,
the state fund has seen an annualized return of 4 percent from
those funds, far more than the 1 percent return delivered by
the Standard & Poors 500 index during the same time.
"We are $1 billion better off because we bet on hedge
funds," Mavromates said.
Massachusetts had allocated 5 percent directly with hedge
funds and had a 6 percent portable alpha investment, for a
total of 11 percent earmarked for absolute return strategies.
Now the fund will allocate 8 percent to alternative strategies.
By the middle of 2010, Mavromates said the pension fund
will have $3.2 billion in hedge funds, up from the $2 billion
it has in right now.
Most of the money coming out of the portable alpha program
will be redistributed among Arden Asset Management, K2
Advisors, Pacific Alternative Asset Management Company, Rock
Creek Group and Grosvenor Capital.
The hedge fund of funds groups Arden, K2, PAAMCO and Rock
Creek were among the firms that helped the state select which
hedge funds to invest with.
After the chaos of the past few years, Mavromates is
imposing new controls on these managers as well.
"Each manager will be more focused," he said. "They will
have tighter guidelines that will play to their strengths." For
example Rock Creek with be asked to focus exclusively on
non-U.S. investment strategies.
(Editing by Steve Orlofsky)