The $47 billion Massachusetts Pension Reserves Investment Management (PRIM) board had a busy 2011 which included the appointment of a raft of direct hedge fund managers and introducing a new risk dashboard. With 2012 set to continue at the same pace, the first quarter of this year will see RFPs for small cap and emerging market debt managers.
The theme for last year, and the overarching philosophy of the initiatives it introduced, was the aim of stabilising the performance of PRIM in the face of continued volatility.
The Massachusetts State Treasurer and PRIM chair, Steven Grossman, says: “A new asset allocation strategy will steer our investments in a direction that lowers risk. A pilot program of direct investments in hedge funds is expected to reduce management fees. Expanded relationships with emerging managers will give PRIM access to additional high-performing investment funds. And our highly successful venture capital and private equity portfolio will add high-calibre funds that will invest in growth companies in Massachusetts and internationally.”
The introduction of the direct hedge fund policy last year resulted in the appointment of a raft of hedge fund managers in two tranches. As mentioned by Grossman, one of the aims of the policy was to reduce management fees. According to PRIM’s board documents the 2012 financial year budget for indirect costs included $35.9 million in hedge fund fees.
The direct hedge fund pilot program aims to span various hedge fund strategies and the managers appointed fit this directive as well as being diversified by geography, size and years in business. The pilot program includes the allocation of $500 million and the appointment of 21 funds managers.
PRIM, which is the investment manager for about 88 per cent of the state and local retirement systems, sought to invest 6 per cent of its direct hedge fund program in market neutral strategies, 10 per cent in multi-strategy funds, 14 per cent in global macro strategies, 15 per cent each in credit and distressed debt strategies, 27 per cent in event driven strategies, and 28 per cent in equity long/short funds.
The direct hedge fund policy constitutes one of PRIM’s major initiatives for 2011. Others included risk management and non-core real estate investment plans.
PRIM executive director, Michael Trotsky, says the fund is about four months into the new risk management plan.
“We will incorporate these tools during the next 12 months to aid us with investment management decisions around manager selection, rebalancing, manager monitoring, and portfolio construction,” he says.
Another cost-focused initiative last year was the completion of two studies on the foreign currency transaction costs of the fund. PRIM negotiates the fees on transactions covering 84 per cent of its foreign exchange trade volume.
In June last year, PRIM staff instructed the investment managers to re-examine their foreign exchange instruction procedures to eliminate standing instructions transactions and negotiate all foreign exchange transactions where possible. As a result, the cost of negotiated trades has decreased from 1.79 basis points to 1.19 basis points from the second to third quarters of last year.
Russell Investments was appointed for foreign currency execution services, and part of its responsibility will be to negotiate transaction fees for transactions involving restricted currencies such as the Brazilian Real and the South Korean Won
Overall, the fund determined in August 2011 that its long-term asset allocation would be 43 per cent in global equity, 13 per cent in core fixed income, 10 per cent in value-added fixed income, 10 per cent in private equity, 10 per cent in real estate, 4 per cent in timber and natural resources and 10 per cent in hedge funds.
At the end of November the fund was overweight equities and private equity by 2 per cent, and underweight hedge funds and value-added fixed income.
Trotsky says reaching the target weights of the new asset allocation is a work in progress.
“We are still in process of issuing RFPs for small cap managers and for emerging market debt managers. Also, the direct hedge fund program is still ramping up and those funds will absorb the additional weighting of 2 per cent to hedge funds in the first two quarters of calendar 2012,” he says.
This year the fund will also issue an RFP for transition management services. It currently employs State Street and BlackRock. An RFP for independent audit services will also be issued.
Trotsky says the investment plan for the next year will be approved by the board at the February meeting.