Rhode Island Halves Hedge Fund Allocation

The state pension aims to reallocate towards low-cost passive funds in a bid to cut costs and boost returns.

Rhode Island’s state pension will halve its hedge fund allocation over the next two years following a unanimous vote by the state investment council, the fund announced Wednesday.

“While our pension system has achieved positive performance and beaten our benchmark, I believe that we can do better.”The move, part of a “Back to Basics” rethink of the $8 billion portfolio, will pull $500 million out of hedge funds to be reallocated to “more traditional asset classes” including low-cost index funds, said General Treasurer Seth Magaziner.

“While our pension system has achieved positive performance and beaten our benchmark since I took office, I believe that we can do better,” Magaziner said. “Our ‘Back to Basics’ approach will improve returns through common sense investments that have proven they can deliver growth and stability.”

The Back to Basics project will see “a majority” of the Employees’ Retirement System of Rhode Island portfolio invested “in strategies designed to produce strong returns over time,” the treasurer said in a statement. While growth and income strategies will be made up of index funds, the rest of the portfolio will be given over to assets “designed to protect the pension system against market risks such as inflation and volatility.”

Magaziner added that the changes were predicted to bring in stronger performance as well as “save millions for taxpayers and strengthen retirement security for our public employees.”

Rhode Island is the latest public fund to reduce its exposure to hedge funds in recent years. Chief among those heading for the exit were the California Public Employees’ Retirement System, which announced its decision to cut its $4 billion allocation entirely in 2014, and the New York City Employees’ Retirement System, which said in April it would scrap a $1.7 billion hedge fund portfolio.

So far this year, the Rhode Island pension has added $334 million through investment gains and contributions, the fund said. These above-benchmark returns came despite the departure of CIO Anne-Marie Fink in June, as she left to join a family office.

Related: Are Insurance Giants Giving Up on Hedge Funds? & Rhode Island Pension CIO Departs