SOMERVILLE, Mass. - The regulatory commission that oversees public pension funds in Massachusetts will not approve hedge fund investments for any retirement system with less than $250 million in assets.
But at least two pension funds - the $166 million Brockton Contributory Retirement System and the $140 million Haverhill Retirement System - are pursuing investments in hedge funds of funds anyway.
When Joseph Connarton, executive director of the Somerville-based Massachusetts Public Employee Retirement Administration Commission, heard that, he sat down and pounded out a letter to all 106 retirement systems PERAC oversees. In that letter, dated Jan. 14, Mr. Connarton reminded the various retirement boards that all of the hedge fund investing guidelines issued by the commission in October 2002 - including the size restrictions and a 5% cap on the amount that can be invested in hedge funds - are firm, and that PERAC will not approve any hedge fund investments for funds that do not meet all of the guidelines.
PERAC is charged with monitoring and overseeing public pension funds by state law, and can force pension funds to comply with its regulations through court order, if necessary, according to the Massachusetts General Laws.
In an interview, Mr. Connarton said the commission spent several months putting the guidelines together, and it expects retirement systems to adhere to them.
"We certainly realize, and the commission is sensitive to the fact that they (the retirement funds) are suffering from negative returns, and are not meeting their assumed rates of return," Mr. Connarton said. "But these are public funds and we will not approve any investment that does not meet these guidelines."
But the retirement funds are not succumbing quietly to PERAC's directives.
The Haverhill board has appealed PERAC's denial of its ability to invest in hedge funds. TheBrockton board put its hedge fund of funds search on hold, but in the meantime is seeking legislative approval to issue between $135 million and $200 million in pension obligation bonds. That would push it over PERAC's minimum assets threshold for hedge fund investments.
Asking the Legislature
Harold P. Hanna, executive director of the Brockton fund, said in an interview that the Brockton City Council recently approved asking the Legislature to issue pension obligation bonds. But even if the state Legislature denies that request, Brockton will appeal PERAC's asset limit and continue to pursue hedge funds.
"It's a question of whether any threshold should be set," Mr. Hanna said. "Five percent is 5%, regardless of whether you have $5 million in assets or $500 million. The concern the retirement board has is that the restriction is arbitrary ... and arguable."
Mr. Connarton acknowledged the $250 million threshold was "a high number for some pension funds," but added the commission felt the need to set some kind of threshold at the outset. The limit could be lowered, or removed altogether depending on the experiences of the retirement funds that do invest in hedge funds, he said.
And the reality is that no public pension funds in Massachusetts that fall under PERAC's purview were allowed to invest in hedge funds until the commission issued its hedge fund investment guidelines memo on Oct. 25. The distribution of that memo followed an Oct. 16 meeting at which the commission approved hedge funds as an investment, provided the retirement boards and the investments meet 11 criteria.
One of those requires retirement boards considering a hedge fund search to submit a letter explaining:
* What the board hopes to achieve by investing in hedge funds;
* How hedge funds fit into the overall asset allocation; and
* What kind of hedge funds would be used and why.
If PERAC does not respond within 10 business days, the retirement board can start the search by issuing a request for proposals that includes the PERAC criteria. Once the board selects a hedge fund or fund of funds, it must send another letter to PERAC detailing the search process, explaining the due diligence performed on the manager and certifying that the board's attorneys have examined the contract and that it is consistent with the board's fiduciary duty.
Mr. Connarton acknowledged there might be other retirement plans searching for hedge fund managers that have not yet notified PERAC. "If they want to hire a (hedge fund) manager without PERAC approval, they can go ahead," Mr. Connarton said. "But we'll find it in the audits and if we find that they're operating outside of our regulations, we can refer them to the attorney general."
If it sounds like PERAC is taking its hedge fund oversight responsibility seriously, that's because it is. Mr. Connarton said the commission started looking at hedge funds a year ago after learning the $350 million Norfolk County Retirement System, Canton, was interested in investing in them.
John S. Keenan, executive director of the Norfolk County system, said the fund had formally notified PERAC of its interest in hedge funds. At its Feb. 26 meeting, the board voted to put together a draft request for proposals for funds of hedge funds. The RFP will be reviewed and a vote to issue it formally will be taken at a subsequent meeting, Mr. Keenan added.
Brockton officials hope to hear from the Legislature in the next few weeks as to whether they can issue the pension obligation bonds. Mr. Hanna said issuing the bonds now makes sense given how low interest rates are.
"Hopefully we can work it out," he said. "But if not, the (retirement) board is disposed to proceed anyway. If PERAC disapproves, the board will appeal it."