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New Jersey Pension Advised to Increase Alternatives

New Jersey’s pension fund should put more money in alternative investments such as private equity and real estate to boost returns and protect against stock losses, consultants told the State Investment Council.

The panel voted to draft regulations that would allow as much as 38 percent of the $68.3 billion fund to be invested in alternatives, compared with a maximum of 28 percent currently, according to former chairman Orin Kramer. Strategic Investment Solutions Inc., the panel’s consultant, had recommended allowing as much as 43 percent of assets to be placed in alternatives.

“This would not necessarily increase New Jersey’s exposure to any alternatives by a nickel,” Kramer said. “It would simply give the council flexibility.”

Council members today also elected a new chairman, Robert Grady, a former partner in the Carlyle Group. Grady, 52, who is chairman of Governor Chris Christie’s Council of Economic Advisers, replaces Kramer, 65, general partner of New York-based hedge fund Boston Provident Partners LP. Kramer’s term expired today.

The panel authorized alternative investments in 2002 and had about $9.8 billion, or 14 percent of its portfolio, through Aug. 31, according to a monthly investment report. Strategic Investment said the council has approved alternatives allocations totaling 19 percent of the 28 percent they are allowed to place in hedge funds and other alternatives.

Investment Limit

New Jersey’s current limit on alternatives is the 18th-lowest among the 21 largest U.S. state pension funds, Pete Keliuotis, managing director of San Francisco-based Strategic, told the council.

“Over the past several years, alternative investments have significantly outperformed public markets on a risk-adjusted basis, and we believe they will continue to do so over the long term,” Keliuotis wrote in a memo to the council.

The fund would realize an additional 30 to 50 basis points of investment gain annually, or anywhere from $210 million to $350 million, with “modestly higher risk,” the report says. A basis point is 0.01 percentage point.

“I’m not buying it,” said council member Jim Marketti, former president of Communication Workers of America Local 1032, the state’s largest public-employees union. “For my money this report is a bunch of voodoo math and voodoo charts.”

Annualized Return

Over the past 10 years, the fund has earned a 3 percent annualized return, compared to the 8.25 percent actuaries assume the fund will gain when they determine the system’s funding adequacy, according to the investment report. Through June 30, 2009, the pension system was underfunded by $46 billion using that measure, and had 66 percent of the assets needed to fund promised benefits, according to data compiled by Bloomberg.

Through Aug. 31, the pension fund was worth $68.3 billion, a gain of about $200 million since the start of the calendar year.

The state Treasury’s Investment Division manages money for New Jersey’s seven pension plans, which provide benefits to about 800,000 working and retired teachers, police officers and government employees.

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