The Massachusetts state pension fund is allocating USD 1.7 billion to five funds of hedge funds managers to help diversify risks and bolster returns.
The five managers that have been selected for the state pension's first foray into hedge funds are: Arden Asset Management of New York; Ivy Asset Management, a New York-based unit of Bank of New York Co.; K2 Advisors of Stamford, Connecticut; Pacific Alternative Asset Management Co. of Irvine, California; and Silver Creek LLC of Seattle.
The Massachusetts Pension Reserves Investment Management Board has agreed to invest about USD 340 million with each of the five managers, with the overall USD 1.7 billion allocation representing 5% of its USD 32.7 billion assets.
The five managers are expected to levy management fees ranging from 0.85% to 1% of assets per year. The pension's investment strategy is to include four key types of hedge fund strategies: event-driven, equity market neutral, merger arbitrage and macro.
The Massachusetts pension fund is the 22nd largest US public pension. It decided to invest in hedge funds last year after the pension lost 9% in 2002, its worst- ever year. At the 5% level, its allocation to hedge funds is one of the highest among US public pensions.
Significantly, the Boston-based pension reversed an earlier decision to invest in single strategy hedge funds, deciding instead to invest in funds of hedge funds, which involve "less oversight and offer more diversification with less risk."
Hedge funds are rapidly moving up the agenda at institutional investors. A study by Greenwich Associates found that 1,000 US pensions, endowments and foundations with USD 5.37 trillion of assets increased their investments in hedge funds last year by 35%.
According to Chicago-based Hedge Fund Research, USD 316.7 billion was invested in funds of hedge funds at the end of 2003 compared with USD 206.9 billion at the end of 2002.