Key Takeaways
- • New Jersey's pension system will cut hedge fund allocation targets in half—from 6% to 3% of total investments—under a new asset-allocation plan approved by the State Investment Council and effective October 2019, continuing a multi-year trend of reduced alternative investment exposure.
- • Investment returns for the state's retirement systems totaled 4.68% during the fiscal year ending June 30, 2019, falling short of actuarial assumptions and fueling labor representatives' concerns over high hedge fund fees during periods of underperformance.
- • The reduction reflects continued pressure from labor representatives on the New Jersey State Investment Council who have cited elevated fee structures and inconsistent returns as justification for scaling back hedge fund exposure, though the move falls short of Governor Phil Murphy's campaign pledge to exit hedge funds entirely.
- • New Jersey joins other major public pension systems—including those in Rhode Island and Kentucky—that have slashed hedge fund allocations by more than 50%, signaling a broader institutional pivot away from alternative investments amid fee and performance scrutiny.
- • The new investment guidelines notably exclude full fossil-fuel divestment, disappointing environmental advocates despite the state's stated goal of eliminating fossil fuels as an energy source by 2050.
Summary
New Jersey's State Investment Council approved a revised asset-allocation plan on May 29, 2019, that materially reduces the role of hedge funds in the state's public-worker pension system. The most significant change cuts the hedge fund allocation target in half, from 6% to 3% of total investments, when guidelines take effect in October 2019. This decision represents a continuation of the state's multi-year effort to reduce exposure to alternative investments and reflects mounting pressure from labor representatives who serve on the oversight panel.
The pullback has been driven by persistent performance and cost concerns. Investment returns for the state's retirement systems totaled just 4.68% during the fiscal year ending June 30, 2019—a figure that fell below actuarial assumptions. Labor representatives, including Eric Richard of the AFL-CIO, have consistently highlighted the disparity between the high fees charged by hedge funds and the lackluster returns generated in recent periods. "I'm happy to see this move in this direction," Richard stated, underscoring labor's support for the reduction.
However, the decision stops short of the more aggressive stance taken by Governor Phil Murphy during his campaign. As a candidate, Murphy called for the state to "get out of the hedge fund business" altogether—a goal that remains unmet despite the 50% reduction. The approved plan represents a compromise between competing institutional interests on the investment council.
The New Jersey action aligns with a broader national trend among major public pension systems reassessing their alternative investment commitments. State pension funds in Rhode Island and Kentucky have similarly slashed hedge fund investments by more than half, signaling growing institutional skepticism regarding the risk-adjusted returns and fee structures of hedge fund allocations. This shift reflects a fundamental recalibration of how large public pension systems view their role in the hedge fund ecosystem and the trade-offs between fee burden and portfolio diversification.
The new investment guidelines also fell short on environmental grounds, as they did not include full divestment from fossil-fuel companies despite environmental advocates' sustained lobbying efforts and the state's stated objective to eliminate fossil fuels as an energy source by 2050.
The pullback has been driven by persistent performance and cost concerns. Investment returns for the state's retirement systems totaled just 4.68% during the fiscal year ending June 30, 2019—a figure that fell below actuarial assumptions. Labor representatives, including Eric Richard of the AFL-CIO, have consistently highlighted the disparity between the high fees charged by hedge funds and the lackluster returns generated in recent periods. "I'm happy to see this move in this direction," Richard stated, underscoring labor's support for the reduction.
However, the decision stops short of the more aggressive stance taken by Governor Phil Murphy during his campaign. As a candidate, Murphy called for the state to "get out of the hedge fund business" altogether—a goal that remains unmet despite the 50% reduction. The approved plan represents a compromise between competing institutional interests on the investment council.
The New Jersey action aligns with a broader national trend among major public pension systems reassessing their alternative investment commitments. State pension funds in Rhode Island and Kentucky have similarly slashed hedge fund investments by more than half, signaling growing institutional skepticism regarding the risk-adjusted returns and fee structures of hedge fund allocations. This shift reflects a fundamental recalibration of how large public pension systems view their role in the hedge fund ecosystem and the trade-offs between fee burden and portfolio diversification.
The new investment guidelines also fell short on environmental grounds, as they did not include full divestment from fossil-fuel companies despite environmental advocates' sustained lobbying efforts and the state's stated objective to eliminate fossil fuels as an energy source by 2050.
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