New Jersey to Cut Its Hedge Funds in Half

Pension fund plans to boost Treasury bonds, private equity investments.

New Jersey’s $76.5 billion public pension plan will slash its hedge fund allocation in half, a move unanimously approved by members of the State Investment Council Wednesday at its Trenton meeting.

As part of a revamp of its investment strategy, the pension program will drop the hedge fund share of the portfolio to 3% from 6%. The fund’s officials have been disappointed in that asset class for some time due to high fee payments and mediocre returns.

At a 38.4% funding level, New Jersey’s investment division also wants to cut some of its riskier assets. It is concerned about the trade war and a possible economic slowdown.

“I am happy to see us move in this direction,” said Eric Richard, one of the investment council’s union members, and also the legislative affairs director for the New Jersey American Federation of Labor and Congress of Industrial Organizations. He also questioned the oft-touted argument to justify hedge funds as offering downside protection.

The new plan also calls for more US Treasury bonds (to 5% from 3%) and private equity (to 12% from 10.25%) investments. It also seeks to take some of its stocks and reinvest in developed markets outside the US.

Gradual implementation of this new strategy will begin in October, with most changes slated to happen by the second quarter of fiscal 2020.

The overhaul marks new thinking under Gov. Phil Murphy’s regime. The last revision was in 2016, under Gov. Chris Christie’s administration. The Christie strategy also pulled back hedge funds (to 6% from 12.5%), but not as much as plan officials would have liked. Christie’s appointees were bullish on hedge funds and other alternatives, citing them as diversifiers while also claiming they produced good returns despite high fees.

Murphy, a former Goldman Sachs executive, is a big critic of hedge funds. When he ran for governor, he pushed for New Jersey to “get out of the hedge fund business.”

New Jersey paid $95.5 million in fees and expenses to its hedge fund managers in fiscal 2018. The space has returned an aggregate 3.1% for credit hedges and 1.54% for equity-based strategies over the past five years. The HFRI Credit and Equity Hedge Total indices have returned 3.57% and 4.07%, respectively, for those two strategies over the same period.

The New Jersey State Investment Council is expecting to return 4.68% in the current fiscal year, which ends June 30. The pension’s assumed rate is 7.5%.

Gov. Murphy was unable to be reached for comment.

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