Is the bloom off the rose for hedge funds of funds? They continue to be popular, even as end investors grumble. The state of Massachusetts has gone so far as to decide it will no longer invest in funds-of-funds. The pension's board is convinced it can be a better fund picker, racking up bigger investment gains and cutting fees substantially.

The pension will start by investing $500 million with individual hedge funds by the end of the year, according to the Boston Globe. The process will be aided by a third-party consultant. We can only hope the consultant candidates are thoroughly vetted, as this is a potential minefield. But if all goes well, the state would place more money directly into funds after that.

The decision stems in part from the on-going insider trading investigations. In the wake of the probes, the state discovered three of the funds-of-funds it does business with had invested small amounts with a firm that was raided.

Poor investments returns also factored into the decision. While bonds, private equity,and stocks in the portfolio all delivered high double-digit returns last year, its hedge funds returned just 6.3 percent, reports the Globe. Among the 10 largest public pensions, only one other fund--Pennsylvania--invests solely through funds-of-funds. Half go entirely direct.

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