New Jersey Pension to Cut $9 Billion Hedge Fund Bet in Half

Updated on
  • Pension targets lower fees of 1% management, 10% incentive
  • State pension lost about 3% this year with hedge fund bets

The New Jersey Investment Council voted to cut its target allocation to hedge fund managers by 52 percent, following similar moves by pensions in California and New York.

The New Jersey council on Wednesday unanimously approved a fiscal 2017 plan that calls for reducing its hedge fund exposure to 6 percent from 12.5 percent amid pressure from labor unions to reduce fees to the investment managers. New Jersey had $9.1 billion committed to investments in hedge funds as of May 31, according to investment reports.

The decision comes after New York City’s pension for civil employees voted in April to exit its $1.5 billion portfolio of hedge funds, and the California Public Employees’ Retirement System divested its $4 billion portfolio in 2014. The industry posted an average 1.2 percent return this year through June, according to Hedge Fund Research Inc., while the S&P 500 Index gained 3.8 percent in that span.

“It sends a message to the hedge fund community that the world has changed,” New Jersey council Chairman Tom Byrne said Wednesday in the meeting in Trenton. “Public funds aren’t going to just pay whatever fees they are charging.”

Lower Fees

The pension’s investments in hedge funds, which typically charge a 2 percent management fee and 20 percent of profits, lost about 3 percent this year through May. The entire pension fund has gained 1.6 percent in 2016.

As part of the plan, the state is targeting to pay only a 1 percent management fee and 10 percent of profits.

The state’s investment division has made almost $1 billion in redemption requests from hedge funds this year, including Brevan Howard Asset Management and Farallon Capital Management. The plan calls for withdrawing an additional $300 million from hedge funds and reducing the number of firms it invests in to below 25 by the end of 2016, according to the documents.

Labor’s Role

New Jersey will eliminate its exposure to long-short equity and event-driven hedge funds next year, the plan says, and reduce its allocation to credit and distressed debt hedge funds to 1 percent from 3.75. Its target allocation to market-neutral and global macro funds will remain at 5 percent.

New Jersey’s equity-oriented hedge fund investments included Pershing Square Holdings Ltd, Jana Partners and Third Point LLC as of the end of May, filings show.

Labor unions have criticized the board for placing pension funds in investments beyond stocks and bonds, saying it puts their ability to retire at risk. They have also complained about the fees paid to outside fund managers, which have come under renewed scrutiny as performance lags behind the broader market.

The state expects to save $127 million per year on management and incentive fees once the restructuring is complete, according to the documents.

At the council’s May meeting, members argued over how much should be allocated to hedge funds, with union representatives pushing to reduce the total to 4 percent.

New Jersey’s pension fund had a market value of $71.9 billion as of May 31.