Rhode Island General Treasurer Seth Magaziner's staff will begin immediately to implement a 50% reduction in the state pension fund's hedge fund, he said Wednesday.
"The mandate is very clear: What we expect from our managers is, part one, that they're uncorrelated to the market and part two, you've got to produce returns," Magaziner said in an interview from Providence after the State Investment Commission unanimously approved his "Back to Basics" initiative.
Rhode Island intends to reduce its investment in hedge fund strategies by more than $500 million over two years, and reallocate these funds to more traditional asset classes. Magaziner said the gradual pullout would reduce fees for the state.
Under Magaziner's predecessor, current Gov. Gina Raimondo, the state came under fire for increasing state investments in hedge funds, which have higher fees and less transparency. Hedge funds now amount to roughly 15% of Rhode Island's $7.7 billion pension fund.
Magaziner looks to reduce that ratio to 6.5%.
"The pension system is much stronger today than it was when Gina Raimondo was first elected treasurer. Between the governor's pension and Medicaid reforms passed last year, Rhode Island is now able to make record investments in K-12 education and make college more affordable and accessible," Raimondo spokeswoman Marie Aberger said in a statement.
"Treasurer Magaziner and the State Investment Commission are keeping with the strategy of having a diverse mix of investments to protect against risk, and the governor continues to support that approach to make sure people's pensions are there when they need them."
Shortly after taking office in January 2015, Magaziner said he would scrutinize Rhode Island's portfolio, including fee structures.
"We were not just looking at hedge funds. We did a review of the whole portfolio," said Magaziner. "We compared ourselves with peer states, endowments and others to see what are options were. We did computer modeling against thousands of economic scenarios and they tested favorably against our existing structure."
Magaziner included financial experts within the state in his review. They included his own staff, members of the State Investment Commission and Retirement Board, and Pension Consulting Alliance, a national consulting firm whose clients include the California Public Employees' Retirement System and the California State Teachers' Retirement System.
"We began this process late last winter winter or early spring," he said.
According to Magaziner, the state pension fund has earned more than $390 million and beat its own benchmark since January 2015.
Under the initiative, growth and income strategies mainly consist of low-fee index funds. The rest of the portfolio will consist of assets designed to protect the pension system against inflation and volatility.
The pension fund earned roughly $20 million in net investment returns in August, beating the plan's benchmark as well as a traditional 60-40 benchmark. During the month, the pension system returned 0.44% compared with the 0.33% return of the benchmark and 0.16% return of the 60/40.
To date in 2016, said Magaziner, the pension has earned roughly $334 million in investment gains and contributions, offset by $256 million in pension benefit payments for a net increase of roughly $77 million.
The State Investment Commission, which Magaziner chairs, oversees state pension system assets as well as non-pension related investments such as the general fund.
Magaziner also expects to propose to the State Retirement Board in the spring to reduce the pension funds' assumed rate of return from 7.5%. He said his staff is still studying what rate to recommend.
