The Rhode Island Investment Commission — the entity that manages investments for Rhode Island’s pension system — on Wednesday voted to slash the system’s hedge fund allocation by more than 50 percent.
The vote changes the pension fund’s investment policy to allow for a 6.5 percent allocation to hedge funds; previously, the number was 15 percent.
The recommendation was made by state Treasurer Seth Magaziner.
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The change will begin to take effect immediately.
Magaziner said the pension plan’s hedge fund stake has had a 4.85 percent rate of return since Governor Gina Raimondo, then the state’s treasurer, spearheaded a move in 2011 to increase the state’s allocation in hedge funds.
“I mean, this is not something that we just woke up and decided to yesterday,” Magaziner said during a briefing with reporters. “This was the process of a very intense, very thorough review process that has lasted for several months, has involved some of the state’s leading investment experts and national investment experts. This was a very deliberate process, and we are making these changes because it is the right thing to do for the strength of pension system and the state’s finances. That’s it.”
The treasurer said Raimondo had a positive reaction when he shared the final version of his recommendation with her last week.
Magaziner also indicated he’s leaning toward recommending lowering the 7.5 percent rate of return for the pension fund, because it is unrealistically high.
“I think that over time it is going be harder to justify the 7.5 percent rate,” he said. “With inflation the way it is, with persistently low interest rates the way they are, the equity markets had a good rally from 2010 to 2014 as we came back from the financial crisis. That’s over now.”