As states struggle with growing deficits and pension shortfalls, lawmakers and investment commissions are forced to do more with less to make ends meet. Rhode Island’s public-pension challenges will require tough decisions and strong leadership. However, the State Investment Commission took a positive first step recently by approving its first direct investment in hedge funds.

Hedge-fund investments are not a silver bullet for Rhode Island’s pension woes, but they have a proven track record of managing risk and delivering consistent returns. And as such, they hopefully will free up state resources that can be used elsewhere to fund vital services for residents. The commission understands this and unveiled a plan to invest as much as $1.1 billion in hedge funds.

The state turning to hedge funds is not as unusual a step as many would think. In recent years hedge funds have evolved from a money-management platform for wealthy individuals to a tool that helps institutional investors provide retirement security, educational scholarships, research and philanthropic endeavors across the nation. In fact, 61 percent of global hedge- fund assets now come from institutional investors.

Pension plans from states such as West Virginia, Wyoming and Wisconsin have announced first-time investment allocations to hedge funds, and other states have outlined plans to increase their allocations as a way of fulfilling their performance targets and reducing risk.

A study recently released by the Managed Funds Association found that a modest increase to hedge funds could unlock as much as $13.67 billion in additional returns each year for struggling U.S. public-pension plans. Similarly, hedge funds have potential to add $1.73 billion to U.S. college and university endowments annually, helping to provide resources at a time of budget cuts and fiscal constraints.

Hedge funds are not entirely new to Rhode Island. According to publicly available data, employers such as MetLife and Raytheon, and academic institutions such as Brown University and the Rhode Island School of Design, invest in hedge funds to help meet their financial objectives.

Rhode Islanders should take comfort in, and support, the leadership of the State Investment Commission. Its decision to invest with hedge funds is an important and prudent move toward reducing investment risk and putting the system on a more sustainable path and ensuring it can pay benefits to the hard-working people who earned them. •