Key Takeaways
- • New Jersey's $76.5 billion public pension plan will cut its hedge fund allocation to 3% from 6%, a 50% reduction, after the State Investment Council unanimously approved the change at its Trenton meeting on Wednesday.
- • The fund has been dissatisfied with hedge fund performance for some time, citing high fees and mediocre returns.
- • The plan shifts capital toward US Treasury bonds (5% from 3%) and private equity (12% from 10.25%), and moves some equity holdings into developed markets outside the US.
- • The plan sits at a 38.4% funding level, and officials are reducing riskier assets over concerns about the trade war and a possible economic slowdown.
- • Implementation begins in October, with most changes expected by the second quarter of fiscal 2020. The overhaul reflects a shift in direction under Gov. Phil Murphy, a former Goldman Sachs executive and vocal critic of hedge funds.
Summary
New Jersey's $76.5 billion public pension plan will halve its hedge fund allocation, reducing the share of the portfolio from 6% to 3%. The State Investment Council unanimously approved the revamped investment strategy at its Wednesday meeting in Trenton. Officials have grown disappointed with the asset class over time, pointing to high fee payments and mediocre returns.
The overhaul also reflects broader concern about portfolio risk. With the pension fund at a 38.4% funding level, the investment division wants to reduce its riskier holdings, citing the US-China trade war and the possibility of an economic slowdown. Under the new plan, US Treasury bonds rise to 5% of the portfolio from 3%, and private equity increases to 12% from 10.25%. The fund also intends to reallocate part of its equity holdings into developed markets outside the United States.
Council member Eric Richard, a union representative who serves as legislative affairs director for the New Jersey American Federation of Labor and Congress of Industrial Organizations, welcomed the change. He also challenged the common argument that hedge funds provide downside protection. Implementation will be gradual, starting in October, with most changes slated for completion by the second quarter of fiscal 2020.
The decision marks a change in direction from the previous revision. In 2016, under Gov. Chris Christie, the plan cut its hedge fund allocation to 6% from 12.5%, a reduction that officials viewed as insufficient. Christie-era appointees had characterized hedge funds and other alternatives as effective diversifiers that generated solid returns despite high fees. Murphy, a former Goldman Sachs executive, has been a prominent critic of hedge funds and campaigned for New Jersey to "get out of the hedge fund business."
The overhaul also reflects broader concern about portfolio risk. With the pension fund at a 38.4% funding level, the investment division wants to reduce its riskier holdings, citing the US-China trade war and the possibility of an economic slowdown. Under the new plan, US Treasury bonds rise to 5% of the portfolio from 3%, and private equity increases to 12% from 10.25%. The fund also intends to reallocate part of its equity holdings into developed markets outside the United States.
Council member Eric Richard, a union representative who serves as legislative affairs director for the New Jersey American Federation of Labor and Congress of Industrial Organizations, welcomed the change. He also challenged the common argument that hedge funds provide downside protection. Implementation will be gradual, starting in October, with most changes slated for completion by the second quarter of fiscal 2020.
The decision marks a change in direction from the previous revision. In 2016, under Gov. Chris Christie, the plan cut its hedge fund allocation to 6% from 12.5%, a reduction that officials viewed as insufficient. Christie-era appointees had characterized hedge funds and other alternatives as effective diversifiers that generated solid returns despite high fees. Murphy, a former Goldman Sachs executive, has been a prominent critic of hedge funds and campaigned for New Jersey to "get out of the hedge fund business."
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