August 3, 2016 / 8:15 PM / 4 years ago

New Jersey slashes hedge fund allocation amid poor returns

BOSTON (Reuters) - New Jersey’s state pension fund plans to slash its hedge fund investments by half, becoming the latest large investor to protest high fees and poor returns after New York and California made similar moves.

The New Jersey Investment Council on Wednesday unanimously voted to reduce its exposure to hedge funds to 6 percent from 12.5 percent, the state and a union official said.

The state has roughly $9 billion invested in hedge funds including ValueAct Capital Partners, Brevan Howard LP, and Och-Ziff Capital Management.

The decision followed months of mounting pressure from unions that complained about the pension funds paying hundreds of millions of dollars in fees to poorly performing hedge funds.

“It was done because hedge funds have failed to deliver,” American Federation of Teachers President Randi Weingarten said in a statement, praising the decision for saving “working people hundreds of millions over the coming years.”

Less than four months ago New York City’s largest public pension voted to exit all hedge fund investments after their consultants said the pension could reach targeted investment returns with less-risky portfolios.

New York City’s Public Advocate Letitia James famously told board members of the New York City Employees System (NYCERS) to let hedge fund managers “sell their summer homes and jets, and return those fees to their investors.”

In 2014, the California Public Employees’ Retirement System (CALPERS) became the first prominent public pension fund to abandon its hedge fund investments, saying they were too costly and complex.

New Jersey has invested with roughly two dozen hedge funds and it pays many of them their typical fees of a 2 percent management fee and 20 percent of their profits. Now the pension fund plans to cut the number of funds it will use and the amount of fees it pays them.

Many of the hedge funds used by New Jersey have performed poorly this year. It has money with William Ackman’s Pershing Square Capital Management whose Pershing Square Holdings fund has lost 19 percent this year through July. In its annual report, New Jersey said its hedge funds returned 4.21 percent during fiscal year 2015, lagging the benchmark which gained 6.10 percent.

This year the average hedge fund has climbed 1.2 percent through the end of June, data from Hedge Fund Research showed, lagging the broader U.S. stock market Standard & Poor’s 500 Index’ 7.7 percent gain through July.

The teachers said New Jersey retirees would have earned $1.1 billion more if trustees had not allocated money to hedge funds, and would have saved $1.6 billion in fees the pension paid to hedge fund managers.

Reporting by Svea Herbst-Bayliss; Editing by Sandra Maler and David Gregorio

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