New Jersey Pension on Defensive Over $600 Million Manager Costs

New Jersey’s pension fund overseers defended their investments in hedge funds, private equity and real estate even as lawmakers and public unions criticized the increasing fees paid to outside managers.

The $81 billion pension, which covers state workers, teachers and first responders, paid about $600 million in fees and incentives in fiscal 2014, according to Tom Byrne, chairman of the state investment council. Most of that went to managers of alternatives, or assets other than stocks and bonds.

“Is it all worth it?” said Senator Paul Sarlo, a Democrat from Wood-Ridge. During a Thursday legislative hearing on the investments and fees, Sarlo asked whether the money paid to Wall Street would be better left in the fund itself.

“It’s a wise fee,” Byrne said. “You have to look at it in the context of profits generated by those fees.”

Chris McDonough, director of the New Jersey investment division, said that though management fees and incentives are higher for alternative investments, they are offset by greater gains. The holdings outperform cash, stocks and bonds over a long period, Byrne said.

Market Volatility

New Jersey began investing in alternatives in 2005 because of losses in the equity markets. As of March 31, the one-year return for the alternatives was 9.7 percent, compared with 7.3 percent for the total fund, according to a report from the investment division.

“A lot of these investments, hedge funds in particular, happen to do well when market volatility is high,” Byrne told the Senate Legislative Oversight Committee in Trenton.

Alternatives in 2006 represented less than 5 percent of pension assets as fixed income was about 25 percent. In 2014, the class was about 27 percent, while fixed-income holdings were less than 15 percent.

Public unions have objected to alternative investments, saying managers are putting their members’ retirement at risk. Unions also are challenging Governor Chris Christie’s partial pension contributions, which have boosted the funding deficit. The state Supreme Court may rule this month whether he must restore a $1.6 billion payment he cut for the year ending June 30.

Jeff Hooke, managing director of Focus Securities, a District of Columbia-based investment firm, called the fees a “bad deal.” In a report commissioned by the New Jersey state AFL-CIO, which represents more than 1 million unionized members, Hooke found the pension’s costs for managers had more than quadrupled since 2010, and totaled $1.5 billion over five years.

“Fees are going to drag down returns for your client,” Hooke told lawmakers. He has performed studies for the Maryland Public Policy Institute that found that states didn’t get higher returns from high-fee investments.

In New Jersey, such costs represented 0.74 percent of pension assets for fiscal 2014, higher than the median 0.51 percent paid by California, Delaware, Maryland, Massachusetts and Virginia, according to his report.

Comparisons of fees paid by other large pension funds aren’t valid, McDonough said, “because there is no standard or consensus” on how they should be measured. Funds like New Jersey that are more transparent than others appear to pay higher fees, the investment division report said.

Some pensions in other states are deciding that tackling their funding gaps through alternative investments doesn’t pay off. The California Public Employees’ Retirement System, the largest U.S. pension system, in September said it will terminate $4 billion in hedge funds because of their expense and complexity.

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