General Treasurer Seth Magaziner has said he is going to reduce the use of hedge funds in the state's $7.6 billion pension fund.
Given the poor returns and high fee structures of hedge funds, a change makes sense. But there is a much larger issue that he and the R.I. State Investment Commission must take on.
The current expected return for the fund is 7.5 percent. Yet a calculation (by the treasurer's office) of returns from 1961-2015 for many asset classes shows nothing close to that 7.5 percent mark. The traditional 60 percent equities/40 percent bonds return for that period was 3.8 percent.
Why does it matter what the expected return is? The lower the returns, the higher the liability. An expected return of say, 5 percent, would make a huge difference in the calculations about how healthy the state worker plan is (and how much needs to be added to it every year).
So by all means, dump an expensive, underperforming asset class. But if you really want to make the state-worker pension fund healthy, you need a realistic rate of return. •