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Connecticut Pension to Enter Hedge Funds After $5 Billion Loss

Date: Thursday, December 11, 2008
Author: Michael McDonald, Bloomberg.com

Connecticut State Treasurer Denise Nappier is proceeding with a plan to invest in hedge funds after market turmoil wiped out $5 billion of pension assets.

Nappier, first elected treasurer in 1998, will begin allocating up to 8 percent of the $20 billion she oversees for public sector employees and teachers into hedge funds after the state’s investment advisory council approved the plan today. Connecticut, which claims to be the world hedge fund capital, is one of the few states that doesn’t invest its public pension in the asset class.

“This is the time to position our portfolio for the long term,” Nappier said today after a monthly meeting of the pension fund’s advisory council in Hartford. “I need that exposure as a diversifier,” she said, referring to hedge funds.

Public pension funds face record drops in assets this year as the worst financial crisis since the Great Depression caused almost $1 trillion of bank losses and dragged the world’s largest economies into recession. The declines may be compounded in states such as Massachusetts where lawmakers are cutting pension contributions to offset budget deficits.

The three retirement funds Nappier controls are heading for the worst annual performance since at least 1991, according to treasurer’s office data. Asset values fell 19.5 percent to $20.7 billion from $25.9 billion between July 1 and the end of October, officials said.

Shift Weighed

The pension fund’s advisory council began considering hedge fund holdings a year ago. The state already invests in private equity funds, another type of alternative investment that became popular among state funds in recent years.

Hedge funds, which are private, largely unregulated pools of capital, lost an average of 17.7 percent this year through November, according to Chicago-based Hedge Fund Research Inc., while the Standard & Poor’s 500 Index dropped 39 percent. Nearly one-third of hedge fund assets under management are controlled by firms based in Connecticut, according to the Connecticut Hedge Fund Association.

To contact the reporters on this story: Michael McDonald in Boston at Mmcdonald10@bloomberg.net.