New Jersey Reduces Hedge Fund Allocation Due to Poor Returns By Reuters

By Svea Herbst-Bayliss

BOSTON (Reuters) – New Jersey’s state pension fund has decided to reduce its hedge fund investments by half, following the trend of other large investors expressing dissatisfaction with high fees and disappointing returns.

The New Jersey Investment Council unanimously voted on Wednesday to decrease its hedge fund exposure from 12.5 percent to 6 percent, according to officials from the state and unions.

Currently, New Jersey has approximately $9 billion invested in hedge funds, including notable firms like ValueAct Capital Partners, Brevan Howard LP, and Och-Ziff Capital Management.

This decision comes after sustained pressure from labor unions that highlighted the substantial fees the pension fund has been paying to hedge funds that have underperformed. American Federation of Teachers President Randi Weingarten commended the move, stating it would save "working people hundreds of millions over the coming years."

Just under four months ago, New York City’s largest public pension fund opted to withdraw all of its hedge fund investments after consultants advised that the fund could achieve its investment goals with less risky portfolios. Public Advocate Letitia James infamously urged members of the New York City Employees System to have hedge fund managers return their high fees instead of using them for personal luxuries.

In 2014, the California Public Employees’ Retirement System (CALPERS) was the first major public pension fund to move away from hedge fund investments, citing their excessive costs and complexities.

New Jersey’s pension fund has been working with about two dozen hedge funds, typically paying a management fee of 2 percent along with 20 percent of the profits. Moving forward, the fund plans to reduce both the number of hedge funds it utilizes and the fees it allocates to them.

The performance of many hedge funds utilized by New Jersey has been subpar this year. For instance, William Ackman’s Pershing Square Capital Management saw its Pershing Square Holdings fund lose 19 percent through July. In its annual report, New Jersey noted that its hedge funds returned only 4.21 percent during the 2015 fiscal year, underperforming against a benchmark that gained 6.10 percent.

As of the end of June, the average hedge fund had performed modestly, gaining just 1.2 percent, while the broader U.S. stock market, represented by the Standard & Poor’s 500 Index, increased by 7.7 percent.

According to teachers’ unions, New Jersey retirees would have accumulated $1.1 billion more if the fund had not allocated resources to hedge funds, along with saving $1.6 billion in fees paid to hedge fund managers.