MassPRIM Board Aims to Slash $30 Million in Fees Via Direct HF Investing

(February 2, 2011) — The $48.3 billion Massachusetts Pension Reserves Investment Management (MassPRIM) Board is looking to invest directly in hedge funds to cut costs and boost returns, the Boston Globe has reported.

Yesterday, the board voted to cut middlemen out of its approach to hedge fund investing, voting to begin investing directly instead of relying on a funds-of-funds approach. Approximately 8%, or $3.6 billion, of the retirement fund’s $48.3 billion in assets is currently invested with hedge funds through funds-of-funds. “We think we can save significant fees, and we think we can eliminate significant manager overlap,” Steven Grossman, the new state treasurer and chairman of the pension board, told the Globe.

According to MassPRIM’s CIO Stanley Mavromates, the Massachusetts pension will keep its fund of hedge funds and launch a direct program on a pilot basis. The fund is on the lookout for a consultant to help place the $500 million it would invest with managers of individual hedge funds by the end of 2011, and will issue a request for proposal for asset allocation consulting services on February 7, with responses due by March 3. It plans to have a recommendation in time for its next April 5 board meeting.

At MassPRIM, hedge funds performed relatively well compared to the benchmark, while private equity, and stocks in December led the fund to nearly 14% gains in 2010 with a nearly $6 billion increase in assets, putting it ahead of its goals, the fund’s Executive Director Michael Trotsky confirmed with aiCIO. The fund-of-funds review was prompted largely by recent concerns over insider trading and accompanying criminal probes at various hedge funds and the informational networks they often employ. Probes by the US Federal Bureau of Investigation into insider trading have led pension funds around the country to keep a closer eye on their investments while rethinking risk controls.

In November, three hedge funds were raided as part of a probe by the FBI, the Manhattan US Attorney’s office, and the Securities and Exchange Commission. One scheme impacted was the Missouri State Employees Retirement System, or MOSERS, which had $104 million — 1.4% of its $7.4 billion portfolio — invested with Diamondback Capital Management LLC, one of the fund’s under investigation. According to the St. Louis Post-Dispatch, MOSERS additionally had an indirect investment of $1.5 million in Level Global Investors LP, another firm under investigation managed by Blackstone Alternative Asset Management, MOSERS’ hedge fund consultant.

MassPRIM’s move to invest directly in some hedge funds comes as Grossman rethink the fund’s allocations and risk controls. Massachusetts’ pension staff said the state currently has a stake in 200 hedge funds, yet they feel they could succeed in running a diversified hedge fund portfolio with less than 100 funds, the Globe reported.