PERAC Memo #37 - 2008: Revised Hedge Fund Guidelines

MEMORANDUM #37, 2008 M E M O R A N D U M TO: All Retirement Boards FROM: Joseph E. Connarton Executive Director RE: Revised Hedge Fund Guidelines DATE: November 10, 2008 At its October 28, 2008 meeting, the Public Employee Retirement Administration Commission (PERAC) approved a revision of its Hedge Fund Guidelines governing and regulating investment in hedge fund strategies for Massachusetts local public retirement systems. The primary changes relate to the asset size limit and allocation limits set forth in the Guidelines. In short those changes are as follows: Retirement boards with investment assets in excess of $150 million may request authorization to conduct a search for hedge fund of funds. The Commission will consider requests from retirement boards with assets below $150 million on a case by case basis and the Commission will consider, among other factors, the retirement board’s overall performance record, its experience in alternative asset classes, the level of expertise utilized by the board, and the clarity and strength of its written submission. The Commission may deny any retirement board the authority to invest in hedge funds if circumstances warrant. Total investment in hedge funds, based on market valuation at the time of investment, cannot exceed the existing combined percentage of the PRIT Core Fund allocated to Absolute Return and Portable Alpha. Any amount in excess of 50% of the maximum hedge fund allocation must be invested in the PRIT Absolute Return segment. Retirement boards below the $150 million asset minimum may invest up to the percentage of portfolio assets established by the PRIT Fund in the PRIT Fund Absolute Return segment without PERAC regulatory action, up to the combined percentage of the PRIT Core Fund that is currently allocated to Absolute Return and Portable Alpha. Issuance of these guidelines does not mean that PERAC endorses the use of hedge funds in retirement board portfolios or considers them an essential component of asset allocation. The guidelines describe a regulatory process that goes beyond that required for other asset classes by existing PERAC regulations. These additional steps are intended to insure that any retirement boards that pursue investments in this area do not do so lightly but with a seriousness and commitment that reflects an understanding of the unique risks in this area. PERAC will deny authorization to any board that fails to communicate a well-conceived, prudently structured strategy for investing in hedge funds. The Commission will refuse to issue regulatory approval for managers it deems to have clearly insufficient or questionable credentials or who fail to meet reasonable standards of experience and capability. The Commission will also deny an application if the process used to select the manager appears flawed or where financial arrangements raise questions about the selection process. The Commission may cite these and other reasons as justification to deny authorization. Any questions concerning the guidelines should be addressed to Robert Dennis, Investment Director, at 617-666-4446 ext. 922.

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