BOSTON — Public pension funds in Massachusetts recently won regulatory approval to increase their allocations to hedge funds, and some have wasted little time doing so.
The Massachusetts Public Employee Retirement Administration Commission, in response to calls from a number of local plans, voted Sept. 25 to boost the permitted allocation to hedge funds/absolute return strategies to 7.5% of plan assets from 5%, said Robert A. Dennis, investment director.
At the same time, PERAC bolstered its guidelines to ensure the 104 local plans it oversees prudently diversify their hedge fund allocations.
PERAC's initial hedge fund guidelines, published four years ago, suggested funds of funds would be safer than direct investments. The latest strictures go further, saying "retirement boards that invest on their own must use funds of funds exclusively" for hedge fund investments. No single fund of funds should account for more than 2% of a plan's portfolio, and the hedge fund portion of the portfolio should have at least 75 underlying hedge funds, the new guidelines say.
Mr. Dennis said PERAC responded to calls from local funds that have "done reasonably well" in using hedge funds to diversify their portfolios in recent years.
PERAC's latest annual report — for calendar 2005 — shows a handful of local funds already at or near the 5% limit, including the $3.7 billion Boston City Retirement Fund; the $493 million Norfolk County Retirement System, Canton; the $155 million Waltham Contributory Retirement System; the $93 million Woburn Retirement System; and the $647 million Worcester Retirement System.
In a telephone interview, Joseph F. Juppe, executive director of the Waltham system, said his plan was one of several that sought to raise the limit on hedge fund investments. "We just sent a letter out to PERAC" in July, asking that the ceiling be lifted to 7.5%, in order to further diversify Waltham's portfolio, he said. Waltham worked in conjunction with its consultant, Boston-based Wainwright Investment Counsel LLC, said Mr. Juppe. Calls to Wainwright weren't returned.