The New Jersey State Investment Council unanimously voted to cut its target allocation to hedge funds in half, reducing investments in these partnerships to about $2 billion.
The pension fund approved the plan on Wednesday to trim the exposure to 3% from 6% under pressure from labor unions looking to reduce fees to investment managers. The state’s hedge fund allocation had a market value of $4.3 billion as of April 30.
“Several members had concerns about this over the last several years,” said Eric Richard, one of the council’s union members. “I am happy to see us move in this direction.” Richard, legislative affairs director for the New Jersey AFL-CIO, said he questioned whether the allocation to hedge funds provided effective downside protection, if the fees were justified and performance was comparable to peers.
The move is the second time in three years that the fund has voted to halve such investments. Other public funds have gone even further. New York City’s pension for civil employees and the California Public Employees’ Retirement System have voted in recent years to dump hedge funds altogether.
The board didn’t say which funds it would cut. Some of the firms it had money with as of last month included Winton Capital Management, MKP Capital Management, Solus Alternative Asset Management, Chatham Asset Management, Davidson Kempner Capital Management and Elliott Management.
Labor unions have criticized the New Jersey board for placing pension funds in investments beyond stocks and bonds, saying it puts their retirement savings at risk. Fees paid to outside fund managers have come under renewed scrutiny as performance lags behind the broader market.
In fiscal 2018, New Jersey paid $95.5 million in management and performance fees and expenses to its hedge fund managers. The performance fees were the highest among the Alternative Investment Program as a percentage of profit at 13.3%. The program includes private equity, real estate, real asset and global diversified credit funds.
For the five years ended April 30, New Jersey’s credit-oriented hedge funds produced annualized gains of 3.1%, while its equity-oriented hedge funds climbed 1.54%. The Barclays US index had an annualized return of 2.6% for the period while the S&P 500 index rose 11.6% with dividends reinvested.
The board also voted to shift its stock allocation to developed markets outside of the U.S. and to modestly increase its stakes in private equity. The changes will take effect in October and be implemented gradually, with the majority of changes in place by the second quarter of fiscal year 2020.
The state fund managed $79.5 billion as of April 30. It supports the retirement plans of about 795,000 active and retired employees in seven public pension systems.
— With assistance by Melissa Karsh, and Janet Lorin(Updates with details on fees in the seventh paragraph.)