NJ to Move into Hedge Funds amid Union Protest

November 9, 2004 (PLANSPONSOR.com) - In a controversial move that has upset multiple state unions, the governing council for New Jersey's state pension fund has voted to allocate up to 13% of its assets to alternative investments within seven years.

By a vote of 7-2, the council chose to move out of the basic investments of stocks and bonds and into these more esoteric vehicles. The state pension fund – which currently manages all $66 billion in assets in-house – has recently lost billions of dollars in the down markets, and is looking to both diversify and generate returns at a quicker rate, according to the New York Times.

The move is being protested by two unions that the pension fund covers. The two votes against the measure were cast by representatives from the state’s teachers unions and general public employees. Lawsuits have been filed in state court by each union hoping to block the move.

State Treasurer John McCormac, defending the move, asserted that the fund was not meeting its fiduciary duty of diversification by simply investing in stocks and bonds, according to the Times. Although he acknowledged that the outside managers in real estate, private equity, and hedge fund firms will cost more – the fund is estimating a 1% management charge, although it admits that this could be much higher – he asserts that it is a necessary move by the fund.

The allocation, over the net five to seven years, will probably be around $8.6 billion, if the target of 13% is reached. This is much higher percentage than the average pension fund allocation to alternative investments (which usually hovers around 3% of assets), according to research from Greenwich Associates, the Time reports.

Alternative investment, for pension funds, have not been a smooth road for some, particularly public funds. In multiple cases, public pension funds have been forced by the courts to disclose their holdings in alternative investments, often precipitating their removal from such vehicles (See  Sequoia Chopping Off UC Venture Ties ).