Rhode Island Cuts Hedge Fund Target Allocation by Half

Sep 28 2016 | 11:09pm ET

Rhode Island’s $7.6 billion pension fund plans to slash its allocation to hedge funds by half over the next two years in a bid to improve returns, the latest public retirement plan to lower exposure to the alternative asset class.

Rhode Island Treasurer Seth Magaziner said the sector's high fees have eaten into already-thin returns and diversification has not been as favorable as expected.

Accordingly, the state’s investment commission will trim its allocation to hedge fund strategies from 15% to 6.5%, effectively cutting more than $500 million from its $1.1 billion in exposure. The capital will be placed into more traditional, lower-cost asset classes such as index funds, Magaziner said in a statement. 

Rhode Island is not the first to pull back from the hedge fund space. The New Jersey Investment Council, New York City’s pension fund and CALPERS have done the same in recent months as high fees and low performance have left managers wondering whether hedge funds are worth the cost. 

The state is still working out which funds will face redemptions, according to the statement, although the ones that remain will be those that deliver consistent returns and have low market correlations. Through the end of August 2016, Rhode Island’s three-year annualized return from equity hedge funds was 3.26%, while a second sub-set booked 4.02%, according to The Wall Street Journal. Both figures were below a 5.89% annualized gain for all pension holdings during the period.

While cutting hedge funds, Rhode Island will also lower its target allocations to TIPS and infrastructure plays, while boosting private equity. 

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