The right move for RI

Posted 10/4/16

It may have slipped past the radar of many Rhode Islanders, but General Treasurer Seth Magaziner made a major announcement last week. The state will significantly reduce the share of its pension fund portfolio invested in hedge funds, turning instead to

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The right move for RI

Posted

It may have slipped past the radar of many Rhode Islanders, but General Treasurer Seth Magaziner made a major announcement last week.

The state will significantly reduce the share of its pension fund portfolio invested in hedge funds, turning instead to what Magaziner dubbed a “Back to Basics” strategy.

In all, the state will reduce the amount it directs to hedge funds by $500 million over the next two years, instead putting that money into “more traditional asset classes” and “common sense investments” that “have proven they can deliver growth and stability.” The move has been backed by the State Investment Commission, of which Magaziner serves as chair.

The investment in hedge funds – which carry high fees in return for what is billed as higher performance than other investment mechanisms – was part of Gov. Gina Raimondo’s strategy to address the state’s pension shortfall during her time as general treasurer, along with the Rhode Island Retirement Security Act of 2011.

Like the reform legislation, the move toward hedge funds came with much controversy, as critics predicted the investment would do more to line pockets on Wall Street than help Rhode Island meet its enormous obligations to retirees. Given what we’ve learned about Wall Street and its behavior since the collapse of 2008, a healthy sense of skepticism – or worse – about such an investment strategy is more than understandable.

Magaziner, in a press conference last week, was fairly explicit in his assessment of how the investment in hedge funds has turned out: “I would say most of them didn’t meet expectations.” Specifically, the treasurer said the funds did not make good on a key selling point – propping up the overall fund during downturns, hence the “hedge” moniker.

Under the “Back to Basics” plan, the treasurer’s office has indicated “a majority of the pension fund will be invested in strategies designed to produce strong returns over time,” mainly low-fee index funds. A portion of the portfolio will also be “invested in assets designed to protect the pension system against market risks such as inflation and volatility.”

“I am committed to bringing a steady and reliable hand to our state’s finances,” Magaziner said through a statement. “With pension costs comprising a large percentage of state and local budgets, the stronger performance projected under our ‘Back to Basics’ strategy can save millions for taxpayers and strengthen retirement security for our public employees.”

Rhode Island is not alone in turning away from hedge funds, as it joins a growing list of states to make the same move. The fund’s performance going forward will ultimately speak to whether Magaziner’s decision is the right one, but we applaud him for making it.

Doing so required a degree of boldness and resolve. Turning the page on hedge funds represents a significant break with Raimondo, who preceded Magaziner in office and is regarded as a close political ally. It also puts full ownership of the fund’s performance on the current treasurer’s desk.

We would not pretend to be financial experts, but based on our understanding of the issue, we do view Magaziner’s move as being in the best interest of Rhode Island’s retirees and taxpayers. We hope it yields the desired results.

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