Key Takeaways
- • Rhode Island Treasurer Seth Magaziner has redeemed over $500 million from seven hedge funds (Ascend Capital, Brevan Howard, Brigade Capital Management, Emerging Sovereign Group, Partner Fund Management, Samlyn Capital, and Och-Ziff) since October 2016, signaling a strategic departure from predecessor Gina Raimondo's hedge-heavy investment approach.
- • The "Back to Basics" investment policy prioritizes traditional asset allocation strategies over high-fee hedge funds that Magaziner determined had underperformed relative to their costs, addressing a criticism leveled by former SEC investigator Ted Siedle against Raimondo's tenure.
- • The $8.17 billion Rhode Island Pension Fund achieved an 11.27% return in the 12-month period ending August 31, 2017, exceeding both the plan's 10.95% benchmark and a traditional 60/40 stock-bond portfolio's 10.21% return, generating over $840 million in investment gains.
- • The shift reflects institutional scrutiny of hedge fund fee structures and performance, with Magaziner's strategy positioning lower-cost, traditional investments as a path to enhanced pension fund stability and beneficiary retirement security.
Summary
Rhode Island Treasurer Seth Magaziner announced that his office has successfully redeemed over $500 million in pension fund capital from seven hedge funds since October 2016, marking a significant strategic reorientation from the hedge fund-centric approach established under his predecessor, Governor Gina Raimondo. The redemptions target positions held with Ascend Capital, Brevan Howard, Brigade Capital Management, Emerging Sovereign Group, Partner Fund Management, Samlyn Capital, and Och-Ziff management.
The move is core to Magaziner's "Back to Basics" investment policy, which fundamentally reassesses the cost-benefit calculus of hedge fund exposure. The strategy found that Rhode Island's previous hedge fund allocations had underperformed relative to their fees, a criticism that echoes concerns raised by former SEC investigator Ted Siedle, who has argued that Raimondo's heavy hedge fund allocation resulted in billions in wasted capital when accounting for underperformance and elevated fee drag from Wall Street managers.
Performance data validates Magaziner's tactical shift. The $8.17 billion Rhode Island Pension Fund delivered an 11.27% return in the 12-month period ending August 31, 2017, surpassing the plan's internal benchmark of 10.95% and outperforming a conventional 60% equity/40% bond portfolio, which returned 10.21% over the same timeframe. The fund generated over $840 million in investment gains during this period. By transitioning away from high-fee hedge fund structures and toward traditional investment vehicles, Magaziner's Back to Basics approach aims to enhance portfolio stability while reducing structural cost headwinds that had eroded net returns.
The policy shift carries broader implications for public pension fund governance, particularly regarding fee sensitivity and fiduciary accountability. Magaziner's repositioning underscores growing institutional skepticism toward alternative investment strategies that fail to generate alpha sufficient to justify their cost premiums, a debate increasingly prevalent among large pension plans evaluating hedge fund allocations against more transparent, lower-cost alternatives.
The move is core to Magaziner's "Back to Basics" investment policy, which fundamentally reassesses the cost-benefit calculus of hedge fund exposure. The strategy found that Rhode Island's previous hedge fund allocations had underperformed relative to their fees, a criticism that echoes concerns raised by former SEC investigator Ted Siedle, who has argued that Raimondo's heavy hedge fund allocation resulted in billions in wasted capital when accounting for underperformance and elevated fee drag from Wall Street managers.
Performance data validates Magaziner's tactical shift. The $8.17 billion Rhode Island Pension Fund delivered an 11.27% return in the 12-month period ending August 31, 2017, surpassing the plan's internal benchmark of 10.95% and outperforming a conventional 60% equity/40% bond portfolio, which returned 10.21% over the same timeframe. The fund generated over $840 million in investment gains during this period. By transitioning away from high-fee hedge fund structures and toward traditional investment vehicles, Magaziner's Back to Basics approach aims to enhance portfolio stability while reducing structural cost headwinds that had eroded net returns.
The policy shift carries broader implications for public pension fund governance, particularly regarding fee sensitivity and fiduciary accountability. Magaziner's repositioning underscores growing institutional skepticism toward alternative investment strategies that fail to generate alpha sufficient to justify their cost premiums, a debate increasingly prevalent among large pension plans evaluating hedge fund allocations against more transparent, lower-cost alternatives.
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