Eric Nierenberg joined the Massachusetts state pension fund management group last summer as head of hedge funds and low-volatility strategies. It’s a mouthful, but Nierenberg is charged with helping the $58 billion retirement fund select better hedge funds and save tens of millions of dollars in fees for the benefit of pensioners and taxpayers. He recently spoke with Globe reporter Beth Healy. Here’s what she found out:
1When he’s not grilling hedge fund managers and poring over statistics, Nierenberg is a teacher at Brandeis University. He teaches a graduate class on behavioral economics and another on options and derivatives, which are securities that are tied to the value of underlying assets, such as stocks.
“I’m able to tell the students, ‘Hey, I actually was talking to a hedge fund yesterday about their straddle strategy.’ They perk up a bit. And when I go talk to hedge funds, because the night before I might’ve been teaching something on credit derivatives, I can start asking really specific questions about it that help me get inside. It’s been really helpful in both directions.’’
2He’s 39. And his right-hand person is a 26-year-old former student, Jiazhu Zhang, who’s now an intern at the state pension fund, helping Nierenberg crunch hedge fund data.
“You’re just trying to statistically take a data series — in this case, monthly returns of hedge funds — and ask the question, ‘What explained the returns that we’ve observed over the last two years, three years, five years?’ ’’
3The state used to employ 237 hedge funds to manage a $5 billion slice of the pension fund. Nierenberg has helped pare back to 22. They’ve fired all but one of the middlemen, or “fund-of-funds,’’ that offer access to other hedge funds. The results have vastly improved, with an 11.6 percent return in 2013 through November, vs. average annual returns of under 1 percent from 2007 to 2011.
“Hedge funds are designed to produce returns between equities and bonds, with a volatility [or ups and downs] much lower than equities — maybe in most cases a little higher than bonds. So on the spectrum of return and risk, it’s in between the two. So that’s how we use them, and that really is the true sense of the word ‘hedge.’ ”
4He’s meeting and negotiating with big-time hedge fund managers like Jonathon Jacobson of Highfields Capital Management. He’s even talking some of them (though not Jacobson) into discounting traditional management fees of 2 percent of the investment and 20 percent of profits. The state saved $29 million on hedge fund fees last year and expects to save as much as $40 million this year.
“Reducing the hedge fund fees has been a major focus. We want to do a lot better.’’
5He’s basically helping the state create its own “fund of funds,’’ or portfolio of hedge funds, instead of paying a third party to do it. The goal is to own the best funds possible, after a period in which the state had exposure to a number of managers involved in investment scandals or losses.
“We’re hedge fund skeptics at heart, and that’s important because we really take a real critical eye in our program. Relative to our expectations, the last two years have been really excellent for our hedge fund program. The portfolio did much better than the average hedge fund.’’
6Instead of just relying on consultants, Nierenberg is digging into the way the state’s hedge funds manage money, to understand if they’re lucky or good.
“When we first did this quantitative analysis, it was both encouraging and sobering at the same time. You talk to a manager, you think a manager is really good, and then you go back and run the numbers, and it’s like, ‘Oh.’ ’’
7His next step is to help the state create some investments that mimic hedge funds, without the big fees. For example, a hedge fund manager might post above-average returns, just by investing heavily in small-company stocks, or small-caps, which tend to outperform the broader market. The pension fund is planning to take $500 million out of hedge funds to devote to its own strategies.
“Why don’t we just get small-cap exposure directly? We don’t need to get it through the hedge fund manager.’’
Correction: An earlier version of this story misstated the amount of money moving from hedge funds to low-volatility strategies. It is $500 million.