Key Takeaways
- • Rhode Island's Investment Commission voted unanimously to redeem $74.3 million from Third Point LLC, citing the fund's high equity market sensitivity (beta risk) as incompatible with the state's pension fund objectives, with funds to be returned March 31, 2014.
- • Third Point delivered a 24.71 percent return in 2013, ranking as Rhode Island's best-performing hedge fund that year, yet the state chose to "lock in gains" of $24.3 million and reallocate approximately $20 million to Samlyn, another equity hedge fund.
- • Rhode Island's $74.3 million investment represents less than 1 percent of Third Point's $14 billion asset base and will not materially impact fund performance, but the departure signals potential concerns about risk profile to other institutional investors.
- • The state's initial $50 million investment in Third Point in 2012 generated a 49 percent cumulative return through 2013, demonstrating strong historical performance prior to the redemption decision.
Summary
Rhode Island's state pension fund is withdrawing its entire $74.3 million allocation from Daniel Loeb's Third Point LLC following a unanimous vote by the Investment Commission on January 27, 2014. Despite Third Point delivering exceptional returns of 24.71 percent in 2013—the highest among Rhode Island's hedge fund allocations—the state determined the fund's equity market sensitivity exceeded acceptable risk parameters for a pension portfolio designed to reduce overall market exposure.
The state's spokeswoman Joy Fox characterized the decision as portfolio optimization rather than performance critique. "The purpose of the hedge fund portfolio is to reduce the pension fund's overall sensitivity to equity market moves," Fox stated, noting that "This fund has the highest equity market sensitivity within the state's hedge fund allocation." The commission will lock in $24.3 million in realized gains and redeploy approximately $20 million to Samlyn, an alternative equity hedge fund positioned as better aligned with the pension fund's risk tolerance.
Rhode Island initially committed $50 million to Third Point in 2012, achieving a 49 percent cumulative return on that capital through 2013 when combined with the fund's strong 2012 performance. Despite this track record, institutional investors periodically reassess hedge fund allocations based on risk-adjusted return profiles and portfolio construction objectives rather than historical performance alone.
For Third Point, a $14 billion fund, the loss of Rhode Island's $74.3 million represents a modest outflow. However, the redemption carries broader signaling implications within the institutional investor community. Pension fund departures, even from well-performing managers, can trigger investor scrutiny about a fund's risk characteristics and suitability for conservative capital allocators. The fund's March 31 redemption date provides adequate liquidity for the transaction.
The state's spokeswoman Joy Fox characterized the decision as portfolio optimization rather than performance critique. "The purpose of the hedge fund portfolio is to reduce the pension fund's overall sensitivity to equity market moves," Fox stated, noting that "This fund has the highest equity market sensitivity within the state's hedge fund allocation." The commission will lock in $24.3 million in realized gains and redeploy approximately $20 million to Samlyn, an alternative equity hedge fund positioned as better aligned with the pension fund's risk tolerance.
Rhode Island initially committed $50 million to Third Point in 2012, achieving a 49 percent cumulative return on that capital through 2013 when combined with the fund's strong 2012 performance. Despite this track record, institutional investors periodically reassess hedge fund allocations based on risk-adjusted return profiles and portfolio construction objectives rather than historical performance alone.
For Third Point, a $14 billion fund, the loss of Rhode Island's $74.3 million represents a modest outflow. However, the redemption carries broader signaling implications within the institutional investor community. Pension fund departures, even from well-performing managers, can trigger investor scrutiny about a fund's risk characteristics and suitability for conservative capital allocators. The fund's March 31 redemption date provides adequate liquidity for the transaction.
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