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Pension officials in state defend hedge funds

Despite Sowood loss, they say investments still beating targets

State pension officials say they will keep investing in hedge funds despite up to $30 million in losses tied to the recent collapse of Sowood Capital Management LP in Boston and $50 million in losses associated with the meltdown of Amaranth Advisors LLC of Connecticut last year.

Some pension systems could even increase their hedge fund holdings under a regulator's decision last week that raised the limit on how much systems can put into hedge funds as long as they spread around the risk.

"We're staying with the program," said Michael Travaglini, executive director of the agency that oversees the $50 billion Massachusetts Pension Reserves Investment Trust handling the retirement assets of thousands of public sector employees.

Sowood, a $3 billion Boston hedge fund founded by former money managers of the Harvard University endowment, lost more than half its value last month. On Monday, Sowood's corporate bond and loan holdings were purchased by Citadel Investment Group LLC of Chicago. Harvard's endowment lost at least $250 million on Sowood, and The Boston Foundation lost about $18 million.

Travaglini said even with the losses, the state's hedge fund stakes purchased in 2004 are still beating their targets. Through June 30 they have returned 10.52 percent, including fees to hedge fund managers.

That's close to the returns of the Standard & Poor's 500 stock market index, 11.6 percent over the same period, and much higher than the Lehman Aggregate Bond Index, which returned 3.9 percent. Travaglini said the goal was for the hedge funds to return 7.7 percent by investing in holdings that carry some risk, but not as much as stocks.

"I know it sounds counterintuitive, but we're not troubled by Sowood because it's part of a disciplined, diversified program," Travaglini said. "You can't make money as an investor without losing money sometimes."

Hedge funds are unregulated investment pools whose managers often make complex bets on futures or commodities and charge high fees while often promising high returns. Growing budget pressures are luring more money from public agencies and college endowments who accept the hedge funds' risks as a way to build revenue without major tax increases. Many critics have voiced concerns, however, including Massachusetts Secretary of State William F. Galvin last year.

Still, officials at the Public Employee Retirement Administration Commission in Somerville, or Perac, which oversees the 104 pension systems around Massachusetts, last week raised the amount systems can put in hedge funds to 10 percent of their total assets from 7.5 percent, as long as they have more than $250 million in total assets.

The catch is that systems are only allowed to invest in what are called "fund of funds," or management companies that invest in many individual hedge funds, which is what the state trust does as well. The approach is more costly than investing directly in individual hedge funds but protects big systems from putting too many eggs in one basket, said Robert Dennis, Perac's investment director. "The funds have had a good run. The catastrophes have been inconsequential," he said.

One example would be the $4.4 billion Boston Retirement System, whose executive director, Robert Tierney, said it lost several hundred thousand dollars last year invested with Amaranth but still met its investment goals with hedge funds. Tierney said the agency is even looking to increase its hedge fund holdings under the state's higher limits.

"It's like any other investment. Sometimes they're running high, sometimes things don't go well," Tierney said.

Boston Foundation spokesman David Trueblood said the community foundation had invested $28.6 million directly with Sowood, out of a total endowment around $800 million. It expects to recover only about $10 million or so, Trueblood said, once final terms are worked out between Sowood and Citadel Investments.

Ross Kerber can be reached at