Raimondo defends pension investments

SPREADING IT OUT: Critics have attacked General Treasurer Gina M. Raimondo’s increase of investment in hedge funds for Rhode Island’s pension system. She says the diversified portfolio will reduce risks long term. / PBN PHOTO/NATALJA KENT
SPREADING IT OUT: Critics have attacked General Treasurer Gina M. Raimondo’s increase of investment in hedge funds for Rhode Island’s pension system. She says the diversified portfolio will reduce risks long term. / PBN PHOTO/NATALJA KENT

Critics of the Rhode Island pension system’s growing investment in hedge funds warn that they’ve increased the state’s exposure to risk while subjecting it to the notoriously high fees charged by alternative-investment managers.
But General Treasurer Gina M. Raimondo, steward of the pension system and target of the attacks, argues that alternatives such as hedge funds and private-equity diversify the state’s assets, making the portfolio safer in the long run.
In fact, Raimondo said the steep fees attached to these investments are a regrettable, but necessary, premium to protect the system from risk, a kind of insurance against the next time stocks start to plummet.
“Most of the work we have done in the last two years has been on the risk side of the equation, trying to reduce risk,” Raimondo said.
“You might even think of it in terms of insurance, paying a little bit in fees so that we have a more-diversified portfolio and less risk, less likelihood of losing a lot of money the next time the stock market crashes,” she said. “The reason we lost so much money in 2009 was everything was correlated with the U.S. stock market. When the stock market went down everything went down and we lost over $1 billion in assets.”
Scrutiny of Rhode Island’s pension-system investments has been heightened since public employees and retirees saw benefit cuts by the Raimondo-led 2011 pension overhaul.
It reached another level after an opinion piece posted on Forbes.com described Raimondo’s hedge-fund bets, and the management fees attached to them, as a wasteful “Wall Street feeding frenzy.”
Rhode Island’s first investments in private equity were in 1982, according to the treasurer’s office, but it was only until Raimondo predecessor Frank Caprio that the system began exploring hedge funds. In June 2011, on the advice of consultant Cliffwater, Raimondo and the State Investment Commission approved an expansion of its hedge-fund position.
Currently the pension system’s total allocation of alternative assets is 22 percent, which Raimondo described as the industry average for state pension systems.
To support this strategy, Raimondo pointed to the long-term performance of alternative investments – over 20 or 30 years – compared with the S&P 500.
This is the investment strategy favored by some of the largest institutional investors in the country such as Yale and Harvard universities.
Of course not all institutions have the size and resources of the largest university endowments and, with the stock market improving, the pension fund could be paying a steep price in fees and lost upside to diversify.
Exactly how much Rhode Island is paying in fees to hedge-fund and private-equity managers is unclear.
Raimondo’s office last week could not provide even a summary of the current fees, even though it’s a subject the treasurer is monitoring. The pension fund is currently using 18 hedge-fund managers.
Since the recession and Raimondo taking office in 2011, Rhode Island pension system’s returns have improved, although much of that could be attributed to how well Wall Street is doing overall.
As of February, the fund’s return for the prior year was 9.2 percent and the three-year return was 9.7 percent, according to monthly meeting minutes of the State Investment Commission.
With the current performance, Raimondo said the state’s 7.5 percent expected rate of return, controversially lowered before the overhaul, is now “in the reasonable range of what we can expect” long term. •

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