The New Jersey Investment Council, the body that sets investment policy for the state’s pension systems, unanimously voted to cut its strategic allocation for hedge funds from 12.5% to 6%, as well as to prioritize low-fee managers.
Union officials had been putting pressure on the Council to make such a move; but ultimately, the Council decided it couldn’t stomach the fees it was paying for a hedge fund portfolio that returned -3 percent last fiscal year.
“It sends a message to the hedge fund community that the world has changed,” New Jersey council Chairman Tom Byrne said Wednesday in the meeting in Trenton. “Public funds aren’t going to just pay whatever fees they are charging.”
The pension’s investments in hedge funds, which typically charge a 2 percent management fee and 20 percent of profits, lost about 3 percent this year through May. The entire pension fund has gained 1.6 percent in 2016.
As part of the plan, the state is targeting to pay only a 1 percent management fee and 10 percent of profits.
The state’s investment division has made almost $1 billion in redemption requests from hedge funds this year, including Brevan Howard Asset Management and Farallon Capital Management. The plan calls for withdrawing an additional $300 million from hedge funds and reducing the number of firms it invests in to below 25 by the end of 2016, according to the documents.
New Jersey will eliminate its exposure to long-short equity and event-driven hedge funds next year, the plan says, and reduce its allocation to credit and distressed debt hedge funds to 1 percent from 3.75. Its target allocation to market-neutral and global macro funds will remain at 5 percent.