The $71.8bn Massachusetts Pension Reserves Investment Management (MassPrim) board has approved the establishment of a $500m programme for direct investments in emerging hedge fund managers at its meeting on 14 August.

MassPrim plans to hire 10 to 15 managers over the next two years, starting with three unnamed candidates set to receive allocations in September.

For the programme MassPrim is looking for macro- or relative value-style managers with $500m or less in AuM, a track record longer than 18 months and annualised volatility of  less than 15%.

The pension fund will be looking to place mandates of between $10m to $50m through separately managed accounts. The programme guidelines call for CIO and executive director Michael Trotsky to approve manager hirings up to the $500m limit.

Allocations beyond that will require board approval.

The first three managers are  expected to receive tickets of $50m each, according to board documents.

The initial allocations will be the culmination of a process that began last year when MassPrim issued an RFP for firms to provide advisory and platform services for the programme. In February the board picked NewAlpha Asset Management as the adviser and Innocap as the platform.

In March, NewAlpha ran a preliminary screen on 219 potential managers and shortlisted 21.

From that group, three were picked as finalists. As NewAlpha and Innocap negotiated with those managers, they have been adding more managers to the list of potential recipients.

The plan is to have an ongoing process of manager sourcing, due diligence, manager reviews and terminations, hirings and rebalancing.

Reviews for rebalancing will be triggered when a manager’s trading balance tops 50% or drops below 10% of the total programme. Reviews for termination will occur if MassPrim observes style drift, performance problems or breaches of regulatory or investment guidelines.

MassPrim already invests in some emerging hedge fund managers through FoHF Paamco, but this programme will serve as a test while the pension fund considers running an internal fund of emerging managers.

MassPrim is moving forward on an internal management program called SAVE II as a way to save on management fees, gain better insight into internal investment managers through hands-on experience and enhancing returns and optimising risk exposures through tailored in-house strategies, according to board documents.

The pension fund has picked some preliminary projects for SAVE II in real estate and private equity, and is weighing other options in fixed income and portfolio completion.

Separately the board also approved investments of up to $400m in three hedge funds – up to $150m each in long/short equity funds managed by Summit Partners Public Asset Management and Basswood Capital Management and up to $100m in a structured credit fund managed by 400 Capital Management.

The Summit Partners and Basswood allocations come from MassPrim’s $9.6bn Portfolio Completion Strategies bucket, which includes hedge funds, risk premia, real assets and equity hedge investments.

Basswood, a $1.6bn New York firm founded in 1995 by two brothers, Bennett and Matthew Lindenbaum, manages long-only and long/short equity strategies that target the financial services sector. MassPrim allocated to the firm’s flagship Basswood Financial Partners fund.

Boston-based Summit is a $15bn growth equity firm founded in 1994. In 2015 Summit bought Alydar Capital, a growth equity hedge fund shop founded in 2003 by John Murphy.

Murphy retired in 2014. CIO and portfolio manager Phil Furse now runs the Summit Partners Concentrated Growth L/S Fund, to which MassPrim allocated.

The 400 Capital allocation comes from MassPrim’s public markets portfolio. The firm’s flagship 400 Credit Opportunities Fund invests in long/short opportunities in agency and non-agency residential and commercial mortgage-backed securities, consumer and commercial asset-backed securities, collateralized loan obligations and related corporate credit.

MassPrim opted to invest in the 400 Capital Asset Based Term Fund, which targets longer-term opportunities in order to capture illiquidity premiums.

MassPrim emerging HF manager program gets green light on HFM InvestHedge.