PERAC Memo #32 - 2009: Adjusted Hedge Fund Limits

MEMORANDUM #32, 2009 M E M O R A N D U M TO: All Retirement Boards FROM: Joseph E. Connarton, Executive Director SUBJECT: Adjusted Hedge Fund Limits DATE: August 27, 2009 The Guidelines for Hedge Fund Investment, as revised by the Commission at its meeting of October 28, 2008, state that : “Total investment in hedge funds, based on market value at the time of investment, cannot exceed the existing combined percentage of the PRIT Core Fund allocated to Absolute Return and Portable Alpha.” Boards with assets in excess of $150 million may request authorization to invest in hedge funds on their own, while any amount in excess of 50% of the maximum permitted allocation must be invested in the PRIT Absolute Return segment. At the time of the issuance of these revised guidelines, the PRIT Fund had a total allocation of 11% in hedge funds, consisting of 5% in Absolute Return and 6% in Portable Alpha. As many of you have been informed, the PRIM Board made a number of asset allocation adjustments at its meeting of August 5, 2009. Among these were the termination of the Portable Alpha program and the increase of the Absolute Return allocation from 5% to 8%. As a result of this change, which will be implemented over several months, the PRIT Fund’s total hedge fund exposure will be reduced from 11% to 8%. In making this adjustment, the PRIM Board considered not only the disappointing performance of the Portable Alpha program but also the strong historical performance of the Absolute Return segment, the expectation that equities would perform better than hedge funds in the coming years, and that, even at 8%, PRIM’s hedge fund allocation would still be higher than the typical allocation seen in public pension funds nationwide. According to our Guidelines, the maximum allowed total allocation to hedge funds for local systems will be correspondingly lowered from 11% to 8%. Those systems that already have allocations in excess of 8% and who remain comfortable with these allocations will not be required to reduce them. Any system now contemplating a hedge fund allocation in excess of 8% must request a supplementary regulation to that effect. Such a request should include a detailed justification for the exception. As before, any questions concerning the hedge fund guidelines should be addressed to Robert Dennis, Investment Director, at 617-666-4446 ext 922.