Rhode Island Withdraws $340 Million from Hedge Funds

State to reduce hedge fund investments by more than $500 million over two years.

Rhode Island has withdrawn $340 million worth of hedge fund investments as part of the state’s effort to save fees and improve returns for its pension system.

“We are moving away from the high-cost hedge funds that have failed to meet expectations while charging unacceptably high fees,” said Treasurer Seth Magaziner. “Our new ‘Back to Basics’ strategy will improve performance and reduce risk, providing a more secure future for Rhode Island public employees and all taxpayers.”

In September, Magaziner announced a “Back to Basics” investment strategy for the Rhode Island pension fund, which included redeeming an estimated $585 million from hedge funds over the next two years.

In October, Rhode Island’s State Investment Commission unanimously voted to terminate its investment in seven hedge funds. These included hedge funds with Ascend Capital, Brevan Howard, Brigade Capital Management, Emerging Sovereign Group (formerly Carlyle Group), Partner Fund Management, Samlyn Capital, and Och-Ziff Capital Management.

With the Back to Basics program, Magaziner said a majority of the pension fund will be invested in strategies designed to produce strong returns over time, mainly in low-fee index funds. The rest of the portfolio will be invested in assets designed to protect the pension system against market risks such as inflation and volatility.

“Under our ‘Back to Basics’ investment strategy, most of our fund is in traditional investments for growth,” said Magaziner in a statement, adding that the “approach will improve returns through common sense investments that have proven they can deliver growth and stability.”

The new strategy followed an intensive review process involving investment experts, including the State Investment Commission and Retirement Board, Treasury investment staff, and Pension Consulting Alliance, a pension investment advisor.

According to its 2016 annual report, Rhode Island’s pension fund earned a 7.4% return to increase more than $530 million last year, the most in the previous three years. And as of March 31, the $7.9 billion pension fund reported a one-year return of 10.81%, which it said beat its own benchmark of 9.96%, and a 60% stock/40% bonds portfolio, which would have earned 9.02%. The fund serves more than 11,000 active members and another 11,000 retirees and beneficiaries.

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