Key Takeaways
- • Rhode Island's state pension fund has allocated approximately $1 billion across 18 hedge funds, representing roughly 14 percent of the state's $7.5 billion pension portfolio, according to Rhode Island Treasurer Gina M. Raimondo and the State Investment Commission.
- • Major hedge fund managers controlling significant Rhode Island pension allocations have delivered mixed results: Daniel Loeb (Third Point, $66 million allocation) generated substantial returns on a Yahoo stake sale; Paul Singer (Elliott Management, $70 million allocation) pursued activist strategies at Hess Corporation; Ken Garschina (Mason Capital, $64 million allocation) posted a 7 percent decline in 2012.
- • The 18 hedge funds deploy diverse investment strategies including short-selling, leverage, risk arbitrage, spread trading, and structured credit across Asian futures, commodities, currencies, distressed securities, and mortgage-backed securities.
- • D.E. Shaw, one of the state's hedge fund managers holding pension capital, serves as the chief financial backer of Deepwater Wind, a Providence-based renewable energy firm that won a federal auction to develop offshore wind farms.
- • State pension officials and outside investment experts view the 14 percent hedge fund allocation as a prudent strategy to reduce overall portfolio risk and volatility.
Summary
Rhode Island has made a substantial institutional commitment to hedge funds, deploying approximately $1 billion across 18 managers as part of a deliberate asset allocation strategy for its $7.5 billion state pension fund. This concentration—representing 14 percent of total assets—reflects a broader trend among public pension systems to gain exposure to alternative investment strategies historically reserved for wealthy individuals and endowments. The allocation has drawn support from Rhode Island Treasurer Gina M. Raimondo, the State Investment Commission, and outside investment experts, who view the strategy as essential for managing portfolio risk and volatility.
The performance of these hedge fund allocations, however, presents a mixed picture. Daniel Loeb's Third Point has demonstrated outsized returns, with Loeb's $66 million Rhode Island pension allocation benefiting substantially from his sale of a 40 million share Yahoo stake—generating proceeds nearly 10 times the original allocation—approximately two years after orchestrating activist changes including the hiring of Marissa Mayer as CEO. Paul Singer's Elliott Management, managing $70 million of Rhode Island pension capital, pursued an activist strategy at Hess Corporation in the spring, acquiring a significant stake and forcing a board shakeup to advance fracking and natural gas exploration initiatives. The outcomes of Singer's Hess position remain uncertain. In contrast, Ken Garschina's Mason Capital, with $64 million in Rhode Island pension assets, experienced a notable setback in 2012 following a nearly $2 billion position in a Canadian telecommunications company, contributing to a 7 percent portfolio decline that year.
The Rhode Island hedge fund portfolio employs a range of sophisticated investment strategies spanning multiple asset classes and geographies. Holdings include positions in Asian futures, Midwestern commodities, global currencies, distressed securities, startup equity, and residential mortgage-backed securities. Common tactical approaches include short-selling, leverage, risk arbitrage, spread trading, and structured credit strategies. This diversification underscores the state's intent to capture alpha across multiple return drivers while managing concentration risk within any single strategy or manager.
A notable intersection between the hedge fund allocation and state economic development involves D.E. Shaw, which manages Rhode Island pension capital while simultaneously serving as the chief financial backer of Deepwater Wind, a Providence-based renewable energy developer. In July 2013, Deepwater Wind secured a federal auction victory to develop offshore wind farm projects off the coasts of Rhode Island and Massachusetts, positioning the state's pension capital to benefit from both direct hedge fund management fees and indirect economic exposure to emerging energy infrastructure.
The performance of these hedge fund allocations, however, presents a mixed picture. Daniel Loeb's Third Point has demonstrated outsized returns, with Loeb's $66 million Rhode Island pension allocation benefiting substantially from his sale of a 40 million share Yahoo stake—generating proceeds nearly 10 times the original allocation—approximately two years after orchestrating activist changes including the hiring of Marissa Mayer as CEO. Paul Singer's Elliott Management, managing $70 million of Rhode Island pension capital, pursued an activist strategy at Hess Corporation in the spring, acquiring a significant stake and forcing a board shakeup to advance fracking and natural gas exploration initiatives. The outcomes of Singer's Hess position remain uncertain. In contrast, Ken Garschina's Mason Capital, with $64 million in Rhode Island pension assets, experienced a notable setback in 2012 following a nearly $2 billion position in a Canadian telecommunications company, contributing to a 7 percent portfolio decline that year.
The Rhode Island hedge fund portfolio employs a range of sophisticated investment strategies spanning multiple asset classes and geographies. Holdings include positions in Asian futures, Midwestern commodities, global currencies, distressed securities, startup equity, and residential mortgage-backed securities. Common tactical approaches include short-selling, leverage, risk arbitrage, spread trading, and structured credit strategies. This diversification underscores the state's intent to capture alpha across multiple return drivers while managing concentration risk within any single strategy or manager.
A notable intersection between the hedge fund allocation and state economic development involves D.E. Shaw, which manages Rhode Island pension capital while simultaneously serving as the chief financial backer of Deepwater Wind, a Providence-based renewable energy developer. In July 2013, Deepwater Wind secured a federal auction victory to develop offshore wind farm projects off the coasts of Rhode Island and Massachusetts, positioning the state's pension capital to benefit from both direct hedge fund management fees and indirect economic exposure to emerging energy infrastructure.
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