2014 Government Regulations & Business Summit
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General Treasurer Gina M. Raimondo has taken more media shots for her choice to allocate 22 percent of the state’s pension funds to alternative investments, including hedge funds.
The argument is that these high-risk investments do little more than contribute high management fees to her former colleagues on Wall Street while imperiling the retirement funds of state workers. Too bad so much of the argument is wrong.
In the long run, much research has shown, the lowest-risk investment is in the broad stock market. But since a pension fund needs to meet defined obligations every year, it needs to be able to count on a certain return on investments. The volatile stock market is not a low-risk strategy in the short term.
The lowest-risk investments, U.S. government bonds, are returning about 2 percent right now. And the State Investment Commission has set its expected rate of return at 7.5 percent. Thus, no-risk bonds are not the answer.
As Ms. Raimondo knows, alternative investments are by design, counter-cyclical, that is they hedge risk. So perhaps returns won’t be as good when markets have a big year. But they won’t be as bad when the market tanks.
The only valid criticism here is the lack of transparency so far in the management fees that the state is paying to fund managers. This is public money, and it should be clear not only how much the state is making on its investments but who is making what to generate those returns.
And by the way, in the last three years, the state’s pension fund has returned 9.7 percent, according to the investment commission. Looks like she’s doing something right. •