The New Jersey State Investment Council on Wednesday unanimously approved an overhaul of its hedge fund portfolio for the New Jersey Pension Fund, Trenton, including cutting the target allocation in half, reducing the number of hedge funds and cutting fees significantly.
The change was part of a review of the $71.5 billion pension fund’s asset allocation by the council, which develops policies governing investments made for the pension fund by the Division of Investment.
Highlights of the council’s vote include:
- Reducing the overall hedge fund target allocation to 6% of total plan assets for the current fiscal year, which started July 1, from 12.5% in the last fiscal year. The target allocation to risk-mitigation hedge funds — market neutral and global macro funds — remained at 5%; the allocation to equity-oriented hedge funds was cut to zero from 3.75%; and credit-oriented hedge funds, cut to 1% from 3.75%.
- Consolidating the number of hedge funds to fewer than 25 from about 40, according to a Division of Investment report presented to the council. “The number of hedge funds would be further consolidated in order to reach the proposed target allocation for fiscal year 2017,” it said.
- Creating a fund alignment and incentive reform, or FAIR, program, that will enable the pension fund to pursue hedge fund strategies “at discounted terms of 1% management fee and 10% incentive fee,” the report said.
- Establishing a new mandate for risk-mitigation strategies to have a flat management fee of 0.75% to 1.25% with no incentive fee, the report said.
The division predicted that the revised hedge fund strategy would save $127 million per year “once the portfolio restructuring is complete,” the report said. “On a pro forma basis, the division projects a 60% reduction in management fees and a 73% reduction in incentive fees.”
The division also forecast that total hedge fund redemptions for the 18 months ended Dec. 31, 2016, “will be at least $2.9 billion,” the report said.
The division submitted redemptions of $1.58 billion between June 30, 2015, and April 30, the report said.
Laurion Capital Management notified the division in April that it would “initiate an orderly wind down” of its Laurion Capital Global Markets Fund, the report said. The division’s net asset value for its investment was $95.7 million as of April 30, of which $93.8 million has been distributed. “The remainder of the balance will be paid after the final fund audit,” the report said.
According to the report, the division also has submitted notices for four full redemptions and one partial redemption for hedge funds as part of its restructuring. It made full redemptions in Farallon Capital Institutional Investors ($97.2 million); Visium Balanced Offshore Fund ($125.2 million); Pershing Square LP ($151.9 million); and Lazard Rathmore Fund ($166.4 million).
The partial redemption notice of $109 million was for Reservoir Strategic Partners Fund. The original investment was $200 million. The hedge fund allocation strategy was triggered by a debate at the May 25 council meeting at which members were scheduled to vote on an asset allocation plan for the 2017 fiscal year.
The division had recommended an overall hedge fund allocation of 9.5%; but some council members demanded a vote on cutting the aggregate hedge fund allocation to a maximum of 4%.
The vote on the 4% cap resulted in a tie, so the motion failed.