MassPRIM Sets Timetable to Cut Out Middlemen

(June 8, 2011) — The board of the $50 billion Massachusetts Pension Reserves Investment Management (MassPRIM) approved a plan on June 7 to pick its first 10 hedge fund managers at its meeting scheduled for October, and an additional 10 managers at its meeting in December.

The timetable marks the implementation of MassPRIM’s February 1 vote to shift about $500 million of its $3.8 billion hedge fund-of-funds allocation to a direct hedge fund pilot program.

“At this point, our June 7 decision was simply to approve the investment policy to allocate $500 million to hedge funds away from five fund-of-funds,” MassPRIM Executive Director Michael Trotsky told aiCIO. “This is a pilot program intended to test our due diligence.” Trotsky added that that they will look at possible hedge funds from “across the gamut.”

Cliffwater LLC serves as the system’s direct hedge fund consultant and will guide the search for the 10 managers. Cliffwater will focus on established, institutional-quality hedge funds firms that could manage additional capital if and when MassPRIM decides to expand the pilot program.

Potential managers will need to have a three-year track record and represent at least $500 million in assets under management. The 10 managers chosen in October will be awarded $255 million, and the 10 chosen in December will be awarded the remaining $245 million. MassPRIM aims to have all initial capital deployed by January 2, 2012.

There has been an exodus of capital in recent years away from hedge fund-of-funds. An April Preqin survey showed the overall hedge fund-of-funds industry has dropped from $1.25 trillion in 2008 to $910 billion as of Q2 2011. The Bernie Madoff scandal in addition to the desire of asset owners to decrease fees in an age of diminishing returns has powered the trend, aiCIO has reported.

For MassPRIM, the shift can largely be ascribed to a change in leadership.

“Tim Cahill, our previous treasurer, felt that having a fund-of-funds approach would achieve better diversification,” MassPRIM spokesman Barry Nolan told aiCIO in April. “But there’s also the argument that with a fund-of-funds strategy, you can reach a point of diversifying too broadly, leading to diminishing returns,” he said, noting the while Cahill, who suffered a tarnished reputation over accusations of political influence, achieved solid returns as treasurer, concern centered on the middle layer of management that his fund-to-funds approach created, aiCIO reported in February.