Key Takeaways
- • New Jersey's State Investment Council approved a reduction in hedge fund allocation targets from 6% to 3% of the $78.2 billion pension system, effective October 2019, cutting exposure by half as part of a broader shift away from alternative investments.
- • The drawdown reflects sustained pressure from labor representatives on the council who have criticized hedge funds' high fee structures, particularly during periods of underperformance relative to their cost burden on the state pension system covering 800,000 current and retired public workers.
- • The reduction falls short of Governor Phil Murphy's campaign pledge to have the state "get out of the hedge fund business" entirely, signaling a cautious rather than decisive pivot away from alternatives.
- • The new investment guidelines also stopped short of full divestment from fossil fuel holdings, disappointing environmental advocates despite the state's stated goal to eliminate fossil fuels as a power source by 2050.
- • New Jersey's move continues a broader national trend among public pension funds re-evaluating their exposure to hedge funds and alternative investments amid fee pressure and performance scrutiny.
Summary
The New Jersey State Investment Council has approved a revised asset-allocation plan that significantly reduces the role of hedge funds in the state's public pension strategy. The new guidelines, set to take effect in October 2019, will cut the hedge fund allocation target in half—from 6% of total investments to 3%—marking another step in the state's gradual retreat from alternative investments. This decision applies to the $78.2 billion pension system, one of the nation's largest, which provides retirement benefits to approximately 800,000 current and retired public workers.
Labor representatives serving on the oversight council championed the reduction, citing persistent concerns over fee structures that have burdened pension returns even during periods of underperformance. Eric Richard, an AFL-CIO representative, publicly endorsed the decision, stating, "I'm happy to see this move in this direction." The vocal labor contingent views the rollback as a corrective measure against the high-fee model that hedge funds have imposed on the system for years relative to actual performance delivered.
However, the reduction in hedge fund exposure does not represent a complete reversal of strategy, nor does it fully align with Governor Phil Murphy's more aggressive campaign-era position. As a candidate, Murphy called for the state to "get out of the hedge fund business" altogether—a directive that the latest asset-allocation plan has not implemented. The compromise signals institutional resistance to a full exit, even as political and stakeholder pressure mounts against continued exposure.
The new investment guidelines also addressed environmental concerns but similarly fell short of stakeholder expectations. The plan did not include comprehensive divestment from fossil fuel holdings, disappointing environmental activists who have lobbied the State Investment Council to adopt firmer positions aligned with the state's 2050 goal to eliminate fossil fuels as an energy source. The partial measures approved reflect the competing priorities and political constraints that typically shape pension fund governance at the institutional level.
New Jersey's recalibration of hedge fund exposure reflects a widening national pattern among public pension funds reassessing their allocation to alternatives in light of fee pressures, performance scrutiny, and evolving stakeholder priorities around both financial returns and environmental, social, and governance considerations.
Labor representatives serving on the oversight council championed the reduction, citing persistent concerns over fee structures that have burdened pension returns even during periods of underperformance. Eric Richard, an AFL-CIO representative, publicly endorsed the decision, stating, "I'm happy to see this move in this direction." The vocal labor contingent views the rollback as a corrective measure against the high-fee model that hedge funds have imposed on the system for years relative to actual performance delivered.
However, the reduction in hedge fund exposure does not represent a complete reversal of strategy, nor does it fully align with Governor Phil Murphy's more aggressive campaign-era position. As a candidate, Murphy called for the state to "get out of the hedge fund business" altogether—a directive that the latest asset-allocation plan has not implemented. The compromise signals institutional resistance to a full exit, even as political and stakeholder pressure mounts against continued exposure.
The new investment guidelines also addressed environmental concerns but similarly fell short of stakeholder expectations. The plan did not include comprehensive divestment from fossil fuel holdings, disappointing environmental activists who have lobbied the State Investment Council to adopt firmer positions aligned with the state's 2050 goal to eliminate fossil fuels as an energy source. The partial measures approved reflect the competing priorities and political constraints that typically shape pension fund governance at the institutional level.
New Jersey's recalibration of hedge fund exposure reflects a widening national pattern among public pension funds reassessing their allocation to alternatives in light of fee pressures, performance scrutiny, and evolving stakeholder priorities around both financial returns and environmental, social, and governance considerations.
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