The New Jersey Investment
Council has voted to reduce its strategic allocation to hedge funds from 12.5%
to 6% of the $71.9 billion portfolio.
“Our approach is strategic. It’s not throwing out the baby with the bath water.”The new mandate, approved
unanimously at the fund’s August council meeting, cuts out all equity-focused
hedge funds and most credit-based funds in favor of low-fee, risk-mitigating
“We have come a long way in
distinguishing the types of alternative investments that will serve us well and
the types that won’t,” council Chairman Tom Byrne said at the meeting
The hedge fund cut follows more
than a year of contention over the pension fund’s alternative
investments. In June 2015, Byrne defended fees
paid to alternative managers at a state senate oversight hearing following
criticism by labor union AFL-CIO over the investments’ high costs.
The debate continued at
January’s council meeting, when consultant Aon Hewitt presented the case for
alternatives. The AFL-CIO followed up in March with its own consultant
presentation, this time advocating for the return to a 60/40
portfolio of stocks and bonds.
The issue came to a boil in May,
when the council was unable to approve an investment plan for 2017 prior to the
start of the fiscal year due to disagreement over capping hedge fund
investments at 4%.
The result Wednesday was a
consensus plan allowing hedge fund investments to range from 0% to 10% of the
portfolio and keeping the strategic allocation to risk-mitigating funds at 6%.
“Our approach is strategic,”
said Byrne. “It’s not throwing out the baby with the bath water.”
“Public funds aren’t going to just pay whatever hedge funds are charging.”Christopher McDonough, director
of the New Jersey Division of Investments, said keeping managers focused on
risk mitigation would allow the program to achieve uncorrelated returns while
retaining the downside protection that makes hedge funds valuable to the
He added that the investment
division would also target low-cost strategies, including flat-fee and reduced-fee mandates. In particular, the division will advocate for discounted terms of
a 1% management fee and 10% performance fee—half of the traditional 2-and-20 model—as
well as a flat management fee of 0.75% to 1.25% with no performance fee for
Overall, he said the allocation
reduction and low-fee initiatives would produce savings of $127 million annually
once the portfolio restructuring is complete.
“It sends a message to the
hedge fund community that the world has changed,” Byrne said. “Public funds aren’t
going to just pay whatever they’re charging.”
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