NJ Pension Fund under Fire for Hedge Fund Investments

November 25, 2008 (PLANSPONSOR.com) - New Jersey's pension fund is under fire over a series of controversial hedge-fund investments.

The Wall Street Journal reports that William Clark, director of the New Jersey Division of Investment, said in an interview Monday that the fund made the investments last month, to funds run by BlackRock Inc., Canyon Capital Advisors LLC, and GoldenTree Asset Management LP, as they were “facing the equivalent of margin calls.” The hedge funds either faced or anticipated facing demands from lenders for cash as the value of those investments fell, the news report said.

When hedge funds face a rise in margin calls from their prime brokers, rather than dump assets in falling or dysfunctional markets to meet those cash demands, some have turned to their biggest investors to bail them out, the Journal explained. BlackRock told the fund it needed $144 million.

Clark told legislators at a public hearing Monday that the hedge funds needed the money quickly and nothing was improper. He noted that hedge-fund investments are disclosed on a monthly basis at regularly scheduled board meetings. New Jersey fund officials called a special board meeting on October 31 to present plans to invest the full $144 million, but only mentioned one of three $49.5 million hedge-fund investments at the October meeting.

Clark responded to legislators that the other two investments, made following the October board meeting were presented as scheduled at the November board meeting.

New Jersey fund officials added that other hedge funds had also requested additional investments for the same reason and the fund turned a couple of those requests down.

State legislators not only are questioning the wisdom of the decisions, but the process as well. At $49.5 million each, the investments came in just below the $50 million threshold that requires the fund to explain an investment to an oversight board before moving forward, the Journal explained.

At the public hearing, the fund said that, effective immediately, information on all alternative fund investments, such as in hedge funds, private equity and real estate, under $50 million will be posted right away on the fund’s Web site.

According to the news report, New Jersey is more aggressive than many pension funds in investing in hedge funds. In 2002, when Orin Kramer, a general partner at Boston Provident, a New York City-based hedge fund, became chairman of the pension fund’s oversight board about two-thirds of the pension fund’s assets were in stocks at the time, and none in hedge funds. By the end of the June 2008 fiscal year, 4.2% of the fund’s then-$78 billion in assets were with hedge funds, and stocks represented just less than half the assets (See  NJ Wins Alternative Investments Challenge ).