Massachusetts Pension Reserves Investment Management Board on Tuesday approved hiring Cliffwater to advise on a pilot program to invest up to $500 million directly in hedge funds by the end of the year.
The pilot program was approved by the $49.5 billion Boston-based system at the board's Feb. 1 meeting. The fund's current hedge fund allocation of $3.8 billion is invested entirely through hedge fund-of-fund managers.
Cliffwater had been the system's general consultant until early 2009, when the firm decided to focus exclusively on alternatives investments. PRIM's selection committee chose Cliffwater as direct hedge fund consultant from among eight firms.
Speaking to reporters ahead of Tuesday's meeting, Steve Grossman, Massachusetts state treasurer and chairman of the PRIM board, said investing directly in hedge funds will give PRIM access to funds that don't participate in fund-of-funds programs, while saving the extra layer of fees — at roughly 84 basis points — paid to hedge fund-of-fund managers.
Even with an asset-based fee of 10 basis points for Cliffwater's services, which will come to $500,000 in the first year of the investment consultant's three-year contract with PRIM, the program should yield a net savings for PRIM of a few million dollars from the start, Mr. Grossman said.
Currently, that extra layer of annual fees PRIM pays to hedge fund-of-funds managers for its $3.8 billion allocation comes to roughly $32 million. The $500 million in assets for the direct hedge fund pilot program will come from trimming allocations to PRIM's five hedge fund-of-funds managers: Arden Asset Management, K2 Advisors, Grosvenor Capital Management, Pacific Alternative Asset Management Co. and Rock Creek Group.
PRIM will proceed carefully and deliberately, Mr. Grossman said, but if the program meets expectations, the direct investment portion of the system's overall hedge fund allocation will expand. In addition to lower fees, he said direct investment in hedge funds hopefully will improve performance.
MassPRIM trustees also voted to retain NEPC as the system's asset allocation consultant.
At the board meeting, Michael Trotsky, PRIM executive director, said NEPC impressed the selection committee as a firm that was “very innovative in their thinking.”
At the same meeting, Stan Mavromates, chief investment officer, said hiring NEPC will allow PRIM to take a more nimble approach to asset allocation and be more proactive in pursuing cutting-edge investment ideas.
Separately, the PRIM board approved a commitment of up to $20 million to Rembrandt Venture Partners Fund Three — a $200 million fund investing in early-stage information technology companies based in Silicon Valley.