The State Investment Council yesterday agreed to cut New Jersey's investments of public-sector pension dollars in hedge funds by over half, in response to union concerns that the alternative investments were not paying off.
In the council's last meeting in May, union representatives called for drastic reduction in the pension system's hedge fund stake, from 12.5 per cent to 4 per cent, but the proposal failed on a tie-vote. Council members appointed by governor Chris Christie warned such a change would not be in the interests of investors without fully vetting its impact on the total investment strategy.
Under the compromise plan worked out yesterday, investments would be cut back to 6 per cent, and the investment in alternatives would be cut from one-third to a quarter.
"This is a good first step to significantly reduce hedge fund exposure," Adam Liebtag, vice chairman of the council and a representative of the AFL-CIO, said in a statement. "The new plan will reduce fees by $120 million and help put the pension plan on stronger footing."
Alternative investments, and hedge funds specifically, had been the subject of disagreement between union leaders and investment representatives. While according to union leaders, the assets failed to pull their weight, investment representatives, say they provided a safety net in market downturns.
The state had around $9 billion invested in hedge funds including ValueAct Capital Partners, Brevan Howard LP, and Och-Ziff Capital Management.
The decision comes after 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. She praised the decision for saving "working people hundreds of millions over the coming years."
It was only a few months ago that New York City's largest public pension voted to exit all hedge fund investments after their consultants said the targeted returns could be achieved with less-risky portfolios.
The city's public advocate Letitia James had 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."
(See: NYCERS to pull money from hedge funds)