PROVIDENCE, R.I. (WPRI) – General Treasurer Gina Raimondo is keeping for now the California financial adviser that helps her office pick hedge funds for the state’s investment portfolio, despite a recent decision by the Massachusetts pension board to cut ties with the same company.
Both Rhode Island’s State Investment Commission (SIC) and the Massachusetts Pension Reserves Investment Management Board (PRIM) voted early in 2011 to award consulting contracts to Cliffwater LLC, a Marina del Rey, Calif.-based financial firm, to help them pick hedge funds as pension investments.
This month, however, PRIM voted against renewing its contract with Cliffwater and instead made Arden Asset Management its new consultant for hedge funds. It’s part of a headline-grabbing push by Michael Trotsky, who heads the Massachusetts board, to reduce spending on investment fees and manage its money more directly.
“That’s the next frontier and we might be at the forefront of it,” Trotsky told Reuters last week. “It will give us full transparency and the ability to better control the assets.”
Rhode Island’s investment commission has the option to terminate Cliffwater’s contract with only a month’s notice under their current agreement, but the state has no plans to do so at this time, Raimondo spokeswoman Ashley Gingerella O’Shea told WPRI.com on Monday.
“The SIC reviewed Cliffwater’s services and performance at its May meeting and continues to have confidence in them,” O’Shea said in an email. “As we do with all consultants and vendors, the SIC will continue to monitor and evaluate Cliffwater on an ongoing basis.”
The Massachusetts pension fund had $5.6 billion of its $59 billion in assets invested in hedge funds as of April 30, while Rhode Island’s allocation was $1.2 billion out of $8.1 billion in assets, according to disclosure documents on their websites. As a share of assets, hedge funds were 14% of Rhode Island’s portfolio and 9.5% of Massachusetts’.
Raimondo, who chairs the SIC as treasurer and is a Democratic candidate for governor, has come under criticism for a May 2011 decision to move pension assets into hedge funds, which say they provide downside protection but also charge significantly higher fees than traditional investments.
Among those who’ve expressed skepticism about the approach is famed investor Warren Buffett, who wrote in a May letter to a member of San Francisco’s pension board: “I would not go with hedge funds – would prefer index funds.”
Massachusetts first hired Cliffwater back in 2011 when the pension board there decided to start investing in hedge funds directly rather than in hedge fund-of-funds, which O’Shea noted Rhode Island did from the start.
“From the beginning, the SIC has chosen to invest in funds directly, rather than through fund-of-funds vehicles,” she said. “As a result, we have not had to pay a second layer of fees that other states are now eliminating. We also continue to look for opportunities to lower fees, while maintaining strong long-term returns and reducing risk.”
Raimondo aides have previously defended the state’s relationship with Cliffwater when the state’s pension investments have come under scrutiny.
“Cliffwater has consistently disclosed to us and its other clients that none of its revenue comes from hedge funds or private equity funds that it recommends,” Anne Marie Fink, Raimondo’s chief investment officer, wrote in an October 2013 letter. “Cliffwater does have, and has had in the past, a few clients who are registered investment advisers … who use Cliffwater to assist in the selection of alternative investment managers, the same services it provides to us.”
Rhode Island pays Cliffwater $450,000 annually for the services of “47 individuals that help us monitor our alternative funds, as well as select new funds and advise redemption when appropriate,” O’Shea said. The firm helps oversee nearly $2 billion of the state’s pension investments, she said.
The much larger Massachusetts pension fund consistently outperforms Rhode Island’s, according to their last updates on April 30. Over the previous 12 months, the Massachusetts fund earned an 11.8% return while the Rhode Island fund earned 9.6%. Over the previous 10 years, Massachusetts earned 7.8% while Rhode Island earned 7.0%.
PRIM said last month Massachusetts has been named “Public Pension Plan of the Year” by the industry publication Institutional Investor, based in part on a push to cut costs that the magazine called “the most aggressive and systematic search for cost efficiencies by a U.S. public pension plan that we have ever seen.”
Coincidentally, Raimondo’s Massachusetts counterpart – State Treasurer Steven Grossman, who similarly chairs the pension board there – is also seeking the Democratic Party’s gubernatorial nomination in his home state this year.
Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi