December 6, 2016 / 8:10 PM / 2 years ago

Massachusetts state fund eyes adding smaller hedge fund managers

BOSTON (Reuters) - Massachusetts, already a large investor in some of the world’s biggest hedge funds, wants to hire an adviser to help find smaller managers that could improve the $63.2 billion state pension fund’s risk and return profile.

The Pension Reserves Investment Management Board on Tuesday voted to issue a request for proposals for advisers to assist in developing an Emerging Hedge Fund Managed Account program, taking what may be a first step to adding fresh hedge funds to its lineup that already includes 28 firms ranging from Glenview Capital Management to Pershing Square Capital Management.

Massachusetts’ move comes at a time many state pension funds, including Rhode Island, New Jersey and some New York funds, are reacting to hedge funds’ meager returns and high fees by cutting not increasing their allocations.

But the state, which has been successful in getting hedge funds to agree to custom accounts that save the pension fund $26.5 million a year, is sticking with hedge funds.

Interest in smaller managers, defined as firms who oversee less than $2 billion, has been fueled by their ability to trade more nimbly and a hunger for success, Eric Nierenberg, the state pension fund’s senior investment officer in charge of picking hedge funds told the trustees.

The state is particularly interested in funds that pursue a global macro/CTA strategy, Nierenberg said, referring to funds that bet on currencies, interest rates, commodities and stocks.

Smaller funds also tend to perform better, Nierenberg added, citing data from EurekaHedge that show how than 2,200 funds managing less than $200 million delivered returns of 10 percent annually. Only 127 funds with over $1 billion in assets delivered similar returns.

Even though Massachusetts’ hedge funds have not delivered eye-popping returns, they have done their job in damping risk, Nierenberg said. Over the last three years, the state’s hedge funds’ have gained 3 percent a year, trailing private equity funds’ 17.7 percent returns.

Nierenberg also assured board members who expressed some concern about hedge fund managers’ openness and honesty. Besides being an investor, he said he sometimes has to play the role of a psychiatrist and encourage managers to speak freely about what is happening in their portfolios.

While managers may not be lying, “sometimes they are not telling the full truth,” Nierenberg said.

Reporting by Svea Herbst-Bayliss; Editing by Alan Crosby

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