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Banking and Finance

Rhode Island Bets Big on Hedge Funds

 Rhode Island has put 14 percent, or $1 billion, of its $7.5 billion in pension fund assets into a form of investment generally considered the exclusive province of sophisticated money managers and wealthy investors: hedge funds. The state is now short selling, leveraging and spread trading in Asian futures, distressed securities and residential mortgage-backed securities by virtue of its holdings in 18 separate funds. 
The state's treasurer, Gina M. Raimondo, and the State Investment Commission, maintain the investments are a prudent way to lower market risk and volatility, which has become vital since the 2008 stock market crash wiped out 25 percent of the state's pension fund, forcing the state to shell out more than $924 million last year for retiree benefits. 
Many investment professionals say hedge funds offer better protection against another major stock-market downturn than the traditional "hedge" investment, bonds, with interest rates so low. By investing in things that aren't correlated to the stock market, they say, hedge funds smooth out the market's ups and downs. 
But critics argue that hedge funds have lagged well behind the market in recent years and the only ones getting rich from them are the Wall Street tycoons who run them. The recent performance of Rhode Island's hedge fund investments seems to bear that out. In the 2012-13 fiscal year, Rhode Island's hedge fund portfolio earned 11.22 percent, while the Russell 3000 stock index earned 21.46 percent. During that same period, the state paid an estimated $45 million in hedge fund management and performance fees. 
"They're turning the pension fund into a fee machine for Wall Street," said Daniel Pedrotty of the American Federation of Teachers. "In the years since 2008, the stock market has roared back. Hedge funds have not. It's a disturbing story." 
But at a recent Investment Commission meeting Raimondo, a former venture capitalist who is considering a run for governor in 2014, said although she is "troubled by the fees," the commission has "reduced risk substantially." 
"A year and a half ago we sat around this table talking about how we've got to protect people's pensions," she said. "We put in place a risk strategy. We monitor these guys. It's working. So I say, let's stay the course." (PROVIDENCE JOURNAL) 

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