Massachusetts Goes the Direct Route with Hedge Funds

October 17, 2011

The state of Massachusetts has decided to make direct investments with 11 of the world’s biggest and best-known hedge fund managers, rather than going the fund-of-funds route.

Trustees for the state’s $46 billion pension fund have voted to allocate $280 million in this new group of investments according to Reuters. The state’s treasurer says the direct route is an effort to save money on fees. Nevertheless, the state did use the consulting firm, Cliffwater LLC, to help them select this first wave of funds.

Cliffwater is an independent advisory firm with offices in Los Angeles and New York City. The firm provides alternative advisory services to institutional investors including endowments, foundations, retirement systems and financial institutions. Cliffwater assists in the sourcing of investments, conducting due diligence, gaining access for clients and monitoring risks, according to its website.

Massachusetts will invest $25 million each in 11 different funds, including: Anchorage Capital Group, Arrowgrass Capital Partners, BlueCrest Capital Management, Brevan Howard Capital Management, Claren Road Asset Management, Elliott Management, Kingdon Capital Management, Och-Ziff Capital Management Group , Taconic Capital Advisors and York Capital Management. Viking Global Investors will receive $30 million. Massachusetts pension officials said another group of 10 managers will be hired in December.

In other state news, California has updated its “Pay to Play” laws regarding hedge fund advisors. With bill SB 398 effective as of October 9, 2011, California has imposed new requirements on professionals who market investment managers and their funds to California pension plans, such as California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).

The new law is designed to prevent “pay-to-play” activities among advisors, and increase the transparency and accountability of agents who work with the state’s pension funds, reports Altassets.com It prohibits a person from acting as a “placement agent” in connection with any potential investment by CalPERS or CalSTRS.

In other words, placement agents, third-party marketers who are compensated to act for an external investment manager, are now considered lobbyists under the new laws.

SB 398 clarifies that placement agents include those who market interests in any type of private investment fund (not just investment management services). This now includes private equity funds, hedge funds, venture capital funds, and real-estate funds.

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