PROVIDENCE, R.I. (WPRI) – The panel that oversees Rhode Island’s $7.63-billion pension fund moved to abandon a money-losing hedge-fund investment more than three months ago, but it’s still unclear when the state will get all its cash back.
The State Investment Commission voted Sept. 22 to redeem its $50-million investment in the Claren Road Credit Fund, which is managed by investment giant Carlyle Group’s Claren Road Asset Management, due to poor performance.
Claren Road has posted an annualized return of -5.63% after fees since Rhode Island made its investment in April 2013, leaving the state’s original $50 million allocation worth only $42.8 million as of Nov. 30, according to a spokesman for General Treasurer Seth Magaziner, who chairs the investment panel.
The vote added Rhode Island to a long list of unhappy clients seeking to redeem their investments with Claren Road. The Wall Street Journal reported last month, citing anonymous sources, that nearly $3 billion has been withdrawn from the firm over the last two quarters.
Some of those investors complained to The Journal that Claren Road planned to delay repayment. David Ortiz, a spokesman for Magaziner, confirmed that Rhode Island’s redemption took effect Dec. 31 but won’t result in the state receiving its money within the usual two- to three-week time frame.
“In this case we will get the liquid portion (easily traded securities) on the normal schedule,” Ortiz said in an email. “The illiquid portion will be in a self-liquidating trust. The manager will seek opportune times to sell the securities without paying up too much for liquidity (taking too much of a discount on the sale).”
“They will return the cash to us as they liquidate the securities,” he added.
Officials at Cliffwater LLC, the California firm hired in 2011 by then-Treasurer Gina Raimondo to pick hedge funds for Rhode Island’s pension portfolio, recommended that the investment commission withdraw its money from Claren Road.
“In addition to poor performance, the Claren Road has not demonstrated adequate portfolio risk controls over the past 12 months,” Thomas Lynch, senior managing director at Cliffwater, wrote in a Sept. 14 memo to the panel. “Performance has also resulted in significant levels of investor redemptions.”
Lynch had recommended Claren Road to the investment commission at a March 2013 meeting, as a replacement for an earlier hedge-fund investment that hadn’t worked out, the Gracie Credit Opportunities Fund. According to meeting minutes, Cliffwater had asked Claren Road to allow Rhode Island to invest only $40 million in the fund, but Claren Road refused to waive its usual minimum of $50 million.
Massachusetts’ pension board cut ties with Cliffwater in 2014.
The Claren Road experience will likely offer further fuel to critics who question Raimondo’s controversial decision as treasurer to begin investing some of Rhode Island’s pension assets in higher-fee hedge funds, particularly in light of the state’s middling investment returns in the years since.
At the Sept. 22 State Investment Commission meeting, Lynch defended the state’s investments in hedge funds, which totaled $1.1 billion as of Nov. 30. He argued they provide stable returns while reducing risk.Ted Nesi (email@example.com) covers politics and the economy for WPRI.com. He hosts Executive Suite and writes The Saturday Morning Post. Follow him on Twitter: @tednesi