By Svea Herbst-Bayliss

BOSTON, Jan 31 (Reuters) - Billionaire hedge fund investor Daniel Loeb will be losing Rhode Island as a client after the state's pension fund found his Third Point LLC too risky for its taste and decided to pull all of its money out.

The state's Investment Commission, which directs how the state's $8 billion pension fund is invested, voted unanimously on Monday to redeem $74.3 million from Third Point, Joy Fox, a spokeswoman for Rhode Island Treasurer Gina Raimondo, said on Friday. The money will be returned on March 31.

"The purpose of the hedge fund portfolio is to reduce the (pension) fund's overall sensitivity to equity market moves," Fox told Reuters in an email, adding "This fund has the highest equity market sensitivity within the state's hedge fund allocation. With this vote, the commission is further reducing the beta risk within this portion of the portfolio."

For Loeb's $14 billion fund, Rhode Island's investment is relatively small and will not dramatically hurt the fund, long considered one of the industry's best performers. But hedge fund managers generally do not like losing pension funds as clients because their departure could send a signal about their overall attractiveness to other institutional clients.

Loeb performed well for Rhode Island last year, earning a 24.71 percent return which ranked Third Point as the state's best performing hedge fund in 2013, according to state documents. Overall the pension fund returned 14.01 percent for the year.

Rhode Island first put $50 million with Loeb's New York-based fund in 2012 and the fund's strong performance in 2012 and in 2013 helped the state earn a 49 percent return on that investment alone.

"The Commission decided to lock in gains of $24.3 million by redeeming from Third Point, and reallocate about $20 million to Samlyn, another equity hedge fund," Fox said in the email.

A spokeswoman for Third Point underscored what Loeb had done for Rhode Island's teachers and other retirees. "Third Point is pleased that Rhode Island's pensioners earned 49 percent, net of fees, over the two years they invested with us," she said, adding the fund's investors "have benefited greatly from our prudent investment approach across multiple market cycles, earning a net annualized rate of return of 21.3 percent since 1995."

Over the years, Loeb's strong returns have made him an industry darling with pension funds and other big investors sending so much new money his way that he decided at the end of 2013 that he would stop taking in any new money at all.

He also is known as one of the industry's most outspoken managers, famous for taking big activist bets and waging aggressive campaigns to make over top management if he thinks the company is not performing well.

He made over Yahoo and helped install a new chief executive, and is now embroiled in a battle with auction house Sotheby's where he told Chief Executive Bill Ruprecht in October that it is time for him to go and that he wants a board seat.

Rhode Island Treasurer Raimondo has also drawn a lot of attention in the Ocean State and on Wall Street by helping reform the state's public pension system and thanks to her bid to run for governor.

But she has also been criticized for putting as much as $2 billion, or one quarter of the pension fund's assets, into hedge funds at a time hedge funds are costly and have not outperformed the market. Last year the average fund gained 9.3 percent while the Standard & Poor's 500 Index climbed 32.4 percent.

Rhode Island is not alone in its commitment to hedge funds. Many states, including Massachusetts, New York, New Mexico and Texas have put millions into hedge funds to try to boost returns after the 2007-2009 financial crisis.